The Group enters
2018 well positioned
to deliver substantial
progress.
Straightforward
transparent banking
Annual Report & Accounts 2017
Contents
1
Introduction
Strategy and business model
Strategic report*
2
4 Chairman’s statement
6 Chief Executive’s statement
14 Financial review
20 Capital, leverage and liquidity
Business review:
22
22 Business Finance
28 Consumer Finance
34 Consumer Mortgages
38 Savings
42 Principal risks and uncertainties
52 Going concern and viability
53 Corporate responsibility
Corporate governance report
57 Chairman’s introduction
58 Board of Directors
61 Corporate governance statement
66 Risk management
69 Nomination Committee report
72 Audit Committee report
78 Risk Committee report
82 Remuneration Committee report
86 Directors Remuneration Report for 2017
94 Summary remuneration policy
98 Directors’ report
102 Directors’ responsibility statement
103 Independent Auditor’s report
Financial statements
110 Consolidated statement of
comprehensive income
111ꢀ Consolidatedꢀstatementꢀofꢀfinancialꢀ
position
112ꢀ Companyꢀstatementꢀofꢀfinancialꢀposition
113 Consolidated statement of changes
in equity
114 Company statement of changes in equity
115ꢀ Consolidatedꢀstatementꢀofꢀcashꢀflows
116ꢀ Companyꢀstatementꢀofꢀcashꢀflows
117ꢀ Notesꢀtoꢀtheꢀconsolidatedꢀfinancialꢀ
statements
182 Five year summary
183 Appendix to the Annual Report
187 Glossary
190 Corporate contacts and advisers
* Pages 2 to 56 form the Strategic report. It includes our Strategy and business model, Financial review, Principal risks and uncertainties and a Business review for each of the
lines of business. Pages 98 to 101 form the Directors’ report.
Strategic Report
Corporate Governance Report
Financial Statements
Introduction
Secure Trust Bank PLC (‘the Bank’)
is an established, well-funded and
capitalised UK retail bank.
The Bank was founded in 1952, was admitted
to AIM in November 2011 and, in October 2016,
successfully moved to the Main Market of the
London Stock Exchange. The Bank and its
subsidiaries are referred to as ‘the Group’.
£25.0m
Profit before tax from continuing
operations
2016: £19.4 million
£1.9bn
Total assets
2016: £1.5 billion
Our History
2017
Secure Trust Bank launches into the
Consumer Mortgages market in March
2014
Secure Trust Bank’s Business Finance
offer is developed with Commercial
Finance and Asset Finance being
formed as divisions within the Group
2013
The Real Estate Finance division is
formed to support SMEs in providing
finance principally for residential
development and investment
The V12 Finance Group is acquired
and subsequently the Group’s existing
Retail Finance business is merged with
the V12 business
The Debt Managers Services business
is acquired
1985
Secure Trust Bank becomes part of the
Arbuthnot Banking Group
1952
Secure Trust Bank is founded
2016
Secure Trust Bank Group is awarded
Investors In People Gold in December
Secure Trust Bank Group steps up into
the Main Market of the London Stock
Exchange in October
Arbuthnot Banking Group reduces its
shareholding in Secure Trust Bank Group
to 18% in June
The Everyday Loan Group is sold in April
The Everyday Loans Group is acquired
2012
2011
Secure Trust Bank lists on the Alternative
Investment Market in November
2008
Secure Trust Bank’s Motor Finance
business begins lending under
the Moneyway brand providing
hire purchase lending products
to a wide range of customers
Excellent
and efficient
service, I would
definitely use
them again.
www.securetrustbank.co.uk
1
Secure Trust Bank PLC Annual Report & Accounts 2017
Straightforward transparent banking
Strategy and business model
This section of the Annual Report and
Accounts contains the Strategic Report
required by the Companies Act 2006 to
be prepared by the directors of the Bank.
It describes the component parts of the
Group’s business; the principal risks and
uncertainties; the development and
performance of the business during the
financial year; and the position of the
business at the end of the year.
Financial and other key performance indicators (“KPIs”)
are used where appropriate. A summary of the KPIs is set
out on page 19 of this Financial Review. Definitions of the
KPIs, their calculation and the reasons for their use can be
found in the Appendix to the Annual Report on page 183.
Group Strategy
The Group’s strategy is to build on its current position as
an established UK retail bank through a focus on carefully
selected and attractively priced segments of the consumer
and business markets, prudent underwriting and a prudent
approach to capital and liquidity.
The Group intends to continue growing its business through
responsible lending across its lending divisions, funded by
customer deposits and backed by the Group’s strong capital
base. It continually monitors and manages its portfolio of
assets in line with its risk appetite.
The strategy is underpinned by three strategic themes and six
values, which are embedded within the Group’s culture and
are used to evaluate each employee’s personal performance:
Strategic Themes
Our Values
Grow
To maximise shareholder value through strong
lending growth by delivering great customer
outcomes in both our existing and new markets.
Our Strategic Themes
Risk Aware
Understanding of risk keeps our customers and us safe
and secure.
Change Orientated
Embracing change and implementing good ideas gives
us a competitive advantage.
Sustain
To protect the reputation, integrity and
sustainability of the Bank for all of our customers
and stakeholders via prudent balance sheet
management, investment for growth and robust
risk and operational control. Controlled growth is
one of the top strategic priorities for the Bank.
Customer Focused
Good customer outcomes are at the heart of everything
we do.
Performance Driven
Secure Trust Bank will only become one of the best
banks in Britain by each employee taking personal
accountability for their performance.
Love
To ensure that the fair treatment of customers is
central to corporate culture and that the Bank is a
highly rewarding environment for all staff and one
where they can enjoy progressive careers.
Teamwork
Companies achieve more when staff work well together.
Ownership
Personal responsibility and taking tasks through to
completion benefits the individual as well as customers.
2
Business Model
The Group’s diversified lending portfolio currently focuses
on three sectors:
• Business Finance: Real Estate Finance, Asset Finance
and Commercial Finance divisions
• Consumer Finance: Motor Finance and Retail Finance
divisions
• Consumer Mortgage Finance.
The Group intends to use its strong capital base to develop
a broad based portfolio, balanced in the longer term across
these sectors.
Lending is primarily funded by customer deposits ranging
from instant access to seven year bonds, augmented by
modest levels of Bank of England scheme funding. Deposit
accounts are promoted to meet funding needs and to
broadly match the maturity profiles of loans and deposits.
Through carefully targeted lending products, the absence of
large fixed overheads in the form of a branch network and a
policy of not cross-subsidising loss making products with
profitable ones, the Group is able to offer competitive
deposit interest rates and has been successful in attracting
deposits from a wide range of customers.
The Group operates principally from its head office in
Solihull, West Midlands, and had 747 employees (full-time
equivalent) as at 31 December 2017. Lending business is
sourced primarily through carefully selected business
partners and through online channels. The Consumer
Finance division utilises underwriting technology to make
lending decisions quickly, resulting in high customer
satisfaction scores, while exercising strong risk management
to minimise losses through bad debts. Business Finance
lending decisions are made on an individual transaction
basis, using expert judgement and assessment against
criteria set out in the lending policies.
Strategic Report
Corporate Governance Report
Financial Statements
Our Divisions
Business Finance
Business Finance’s divisions include Real Estate Finance,
Asset Finance and Commercial Finance
£824.0m
2017 Total Business
Finance lending
31%
Increase in Business
Finance lending
Page 22 to read more about Business Finance.
Consumer Finance
Consumer Finance’s divisions include Retail Finance,
Motor Finance and Personal Lending.
£726.9m
2017 Total Consumer
Finance lending
29%
Increase in Consumer
Finance lending
Page 28 to read more about Consumer Finance.
Consumer Mortgages
Launched on the 20th March 2017. The division supports
residential customers who are underserved by the
traditional high street lenders.
£16.5m
2017 Total Mortgage lending
Page 34 to read more about Consumer Mortgages.
Savings
The Group undertakes its funding primarily via retail savings;
attracting balances with competitive rates of interest
£1,483.2m
2017 Total customer deposits
29%
Increase in total
customer deposits
Page 38 to read more about Savings.
www.securetrustbank.co.uk
3
Secure Trust Bank PLC Annual Report & Accounts 2017
Straightforward transparent banking
Chairman’s statement
Last year was the 65th anniversary of the
foundation in 1952 of the Secure Trust Group.
It has been a year of significant change and
the Group enters 2018 well positioned to
deliver substantial progress. Throughout
2017 there has been a considerable
repositioning of our balance sheet.
4
The Group ceased originating sub-prime motor finance and
medium term unsecured personal loans and in December we
sold the legacy unsecured personal loan portfolio. This year we
will continue to run down the legacy sub-prime motor book.
2018 begins with a lower risk balance sheet and our largest
ever pipeline in real estate and commercial finance. Since
being acquired by the Group five years ago our retail finance
company, V12, has grown strongly and is expected to continue
to do so. The investment in our invoice finance business is
also expected to make an important contribution. A new and
highly experienced leadership team is tasked with growing
and diversifying our motor lending operation and our nascent
mortgage operation is fully operational and writing business.
2017 was also the first full year in which the Group was
listed on the main market of the London Stock Exchange.
The new enlarged Board is working well and we will continue
to strengthen our governance and respond to the changes
proposed to the UK Corporate Governance Code. I am
grateful for the extensive work which has been undertaken
by the chairs of all our Board committees. During 2017 the
Remuneration Committee implemented the remuneration
policy approved at the 2017 Annual General Meeting.
Last year we launched our first ever all employee share
save scheme and over 41% of eligible staff subscribed.
I was delighted and encouraged by such a high level of
participation. I am impressed too with our colleagues who
have given their support to local and national charities.
STB has a matching funding scheme which the Board agreed
to enhance in 2017 and the busy charity committee has
coordinated more than 900 hours of volunteering. It was a
great privilege to visit the St Mary’s Hospice in Birmingham
to see for myself the work and care which has been
enthusiastically supported by so many of our staff.
Our business is heavily regulated and we continue to invest
in the resources required to satisfy the requirements of the
FCA and PRA.
The Board is proposing a final dividend of 61 pence per share.
This, when added to the interim dividend of 18 pence,
would mean a full year dividend of 79 pence per share.
If approved, the final dividend will be paid on 25 May 2018
to shareholders on the register as at 27 April 2018.
Finally, the members of the Board would like to express their
thanks to all of our colleagues across the Group for their
continued dedication and commitment.
I look forward with confidence to another year of growth
building on the hard work done in 2017.
Lord Forsyth
Chairman
21 March 2018
Strategic Report
Corporate Governance Report
Financial Statements
The Group enters 2018
well positioned to deliver
substantial progress.
www.securetrustbank.co.uk
5
Secure Trust Bank PLC Annual Report & Accounts 2017
Straightforward transparent banking
Chief Executive’s statement
The Group’s operating
income grew by 21%
to a record level.
6
I am pleased to be able to report that on
a continuing operations basis Secure Trust
Bank (‘STB’) increased statutory profit
before tax in 2017 by 28.9% to £25.0 million
(2016: £19.4 million) with the Group
delivering further loan book growth of
27% to c.£1.6 billion (2016: £1.3 billion).
Underlying profit before tax on a continuing
basis was £27.0 million (2016: £27.3 million).
Strategic Report
Corporate Governance Report
Financial Statements
Inclusive of continuing and discontinued operations
statutory profit before tax increased by 6.5% to £29.3 million
(2016: £27.5 million) and underlying profits on this basis were
£31.3 million (2016: £32.9 million). This profit growth was
achieved notwithstanding the very significant strategic
repositioning of the Bank’s balance sheet away from higher
margin / higher risk, consumer unsecured and sub-prime
motor lending and a substantial investment in launching
a new mortgage division and a new deposit IT platform.
All of this took place whilst continuing to deliver positive
outcomes for customers and sustaining very high levels of
customer satisfaction.
Having largely completed the majority of the Bank’s balance
sheet repositioning, the Group entered 2018 with robust
capital and liquidity positions, no direct or indirect exposures
to sub-prime unsecured personal lending and a reducing
exposure to sub-prime motor finance. With new business
pipelines in our SME operations at record highs and continued
good momentum in the consumer business lines, we are
well positioned in a number of attractive lending classes and
expect good progress to be made in meeting our goals over
the coming periods.
Profitable growth on a rebalanced loan book
The sale of the unsecured loan portfolio in December
requires the accounts to be presented to take account of
continuing and discontinued activities. Comparisons with
2016 are complicated by the substantial one off profit
generated by the disposal of Everyday Loans in 2016.
Continuing operations generated statutory pre-tax profits
for 2017 of £25.0 million which are 29% higher than the
prior year of £19.4 million. This growth has been achieved
notwithstanding the rundown of the higher risk consumer
portfolios, the growth in lower margin / lower risk new
business, and the ongoing investment in the business model,
especially in the mortgage operations and the new customer
deposit platform.
Excluding discontinued operations, the Group’s operating
income grew by 21% to a record level of £129.5 million
(2016: £107.0 million) whilst operating costs rose 10.9%
to £71.3 million from £64.3 million in 2016.
Excluding discontinued operations, loan impairments of
£33.5 million (2016: £23.3 million) rose by 43.8% reflecting
growth in the continuing loan portfolios, an increase in the
levels of provisions held against the sub-prime motor book
that is in run off, and an increase in the levels of interest
bearing balances written in Retail Finance.
Despite substantial investment to support future growth,
costs continue to be robustly managed as reflected in the
cost to income ratio of 55.1% (2016: 60.1%).
www.securetrustbank.co.uk
7
Secure Trust Bank PLC Annual Report & Accounts 2017
Straightforward transparent banking
Strong capital ratios and modest leverage
Our year end CET1 capital levels are robust with a CET1
ratio of 16.5% comparing to the 2016 year end position of
18.0%. The total capital ratio was 16.8% and STB’s leverage
ratio was 12.3% (2016: 14.5%) as at 31 December 2017.
This ratio is comfortably ahead of minimum requirements and
demonstrates capacity to continue growing customer lending
balances in 2018. The year on year movement is a function of
the investment of capital to support the strong growth in the
loan portfolios and an increase in the buffers all banks are
being required to hold by regulation.
Throughout 2017, the Bank of England has, via the Financial
Policy Committee and the PRA, expressed concerns about
the UK Consumer Credit market. The Financial Conduct
Authority (FCA) has echoed many of these. Both regulators
have subsequently taken steps to address their concerns and
it seems increasingly possible that the FCA will intervene in
some lending markets. Our assessment is that Secure Trust
Bank continues to operate in line with regulatory expectations
and as a result we would not expect to be negatively
impacted by any regulatory changes with regard to product
or conduct.
In the recent past I have highlighted my views that risk is
being mispriced in a number of lending markets in the UK.
Our early recognition of what we regard as unsustainable
market dynamics and assessment of the economic outlook
has informed the strategic repositioning of the Group’s
business model over the last two years which culminated in
the sale of the legacy unsecured personal loans portfolio in
December 2017. In an understandable move to cool over
exuberant consumer lending the Bank of England decided
to increase the UK countercyclical capital buffer rate to 0.5%
(of risk weighted assets) from 0%. This is scheduled to increase
further to 1% in November 2018. It is very frustrating that this
buffer applies to all banks and does not distinguish between
those like Secure Trust Bank, which have exited overheating
parts of the consumer credit markets, and others.
Chief Executive’s statement
continued
Prudent balance sheet and risk management
Our ongoing priority is to safeguard the reputation
and sustainability of STB through prudent balance sheet
management, investment for long-term sustainable growth
and robust risk and operational controls.
Over the last couple of years we have been investing in
a new deposit platform which went live in the final quarter
of 2017. This was a major IT programme which, as previously
disclosed, is expected to confer several benefits for the
Group, enhancing the offering, providing internet banking,
and improving efficiency and risk controls while providing
flexibility to introduce new products. The new technology
is also enhancing our customer service proposition whilst
providing much greater scalability than the previous platform.
STB seeks to limit exposure to short term wholesale funding
and interbank markets and broadly match fixed term fixed
rate customer lending with customer deposits of the same
tenor and interest rate basis. This helps us to minimise
maturity transformation and interest rate basis risk. The new
deposit platform will allow us to fund our very short term
lending activities, such as Invoice Finance and some Retail
Finance, with lower cost shorter duration deposit products
thereby enhancing our competitive positioning without
diverging from our historic approach of matching assets
and liabilities.
Our year end loan to deposit ratio was 107.8% (2016: 109.0%).
Customer demand for our deposit products remains very
strong, and I am pleased to note that the majority of
customers with maturing medium term savings bonds chose
to reinvest their funds into deposit products with us.
Usage of the Bank of England’s (BoE) Funding for Lending
and Term Funding Schemes remains a nominal 7% of total
lending balances and as a result we will not have big
refinancing risks to manage as these schemes are repaid
over the next four years. I expect that the closure of the
schemes will alter competitive dynamics in the market.
The implication for STB is that market pricing, particularly
in mortgages, should move closer to where we have priced
lending without the benefit of the cheap BoE money and
thus our competitive position should strengthen. We have
already seen some specialist mortgage lenders increasing
their pricing albeit I expect it will take a number of months
for the effects of the closure of the schemes to work through
in terms of market dynamics.
8
Strategic Report
Corporate Governance Report
Financial Statements
Customer lending activities
Strong double digit percentage growth was achieved
across the Group’s loan portfolio in 2017 notwithstanding
the increasingly cautious stance taken as the year
progressed, the decisions to cease new business origination
in unsecured personal lending and sub-prime motor in the
first quarter and the repayment of the vendor loan provided
to Non Standard Finance PLC in connection with their
purchase of Everyday Loans.
Total annual new business lending volumes exceeded
the £1 billion mark for the first time and grew 16.4% to
£1,077.1 million (2016: £925.3 million) which translated to
an increase of 27.3% in overall balance sheet lending assets
to £1,598.3 million (2016: £1,255.5 million for continuing
operations).
Consumer Finance
Total consumer lending in 2017 increased 29% to
£726.9 million (2016: £562.1 million). Our Consumer
Finance lending strategy during 2017 was centred on
running off higher margin / higher risk unsecured personal
loan and sub-prime motor portfolios, which have been
historically profitable, and allocating capital to support the
continued growth in Retail Finance, which is shorter term in
duration and prime in nature, and higher quality new
business in Motor Finance. As noted, we ceased originating
new sub-prime motor finance and unsecured personal
loans in Q1 2017. Given the ongoing regulatory focus in
the unsecured personal loan and high cost credit markets,
I feel our retrenchment from these markets was well
timed even if the repositioning has created a drag on
profit growth.
The Retail Finance point of sale business, net of
provisions, grew strongly as intended, with balances at
31 December 2017 increasing 38.8% to £452.3 million
(2016: £325.9 million). Our Retail Finance business has
continued to evolve as we have grown into one of the
largest participants in this market. We are writing a broader
spectrum of business including increased levels of interest
bearing lending. This lending has higher levels of
impairments compared to interest free finance and this is
factored into our pricing to ensure we achieve our targeted
risk adjusted return. The impairments and risk adjusted
returns in 2017 have been in line with our expectations.
* Underlying profit is the profit attributable to continuing operations, adjusted
for items that are outside of the Group’s normal recurring business activities.
A reconciliation of underlying profit before tax to statutory profit before tax
is provided on page 14.
Financial Highlights
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Total assets
128.8p
Earnings per share
2016: 754.1p
2015: 157.8p
www.securetrustbank.co.uk
9
Secure Trust Bank PLC Annual Report & Accounts 2017
Straightforward transparent banking
Chief Executive’s statement
continued
We started the year with
a new business pipeline
which is higher than it
has ever been.
We made significant progress in repositioning the motor
book. During 2017 all lenders operating in the sub-prime
market reported a trend of increasing impairments.
These trends would appear to vindicate our decision to
exit sub-prime motor finance after we identified warning
signs in this part of the market during the second half of
2016. Notwithstanding the cessation of new sub-prime loan
origination, STB has been able to achieve strong lending with
lending balances, net of provisions, growing 16.3% to
£274.6 million at 31 December 2017 (2016: £236.2 million).
The vast majority of motor finance business now being
written is in our two highest quality categories and is
performing in line with our expectations. The proportion
of lending written in these categories in the final quarter of
2017 was almost double that in the same period in 2016.
The average loan to value of this lending is materially lower
than has historically been the case. This change in the new
business mix is driving a significant shift in the quality of the
overall portfolio which should over time drive higher returns.
Recognising the run off nature of the sub-prime motor book
we have increased the level of provision coverage held which
has driven an increase in impairments in this portfolio.
As previously announced, the unsecured personal loan
(UPL) portfolio was sold in December 2017. STB has a large
amount of experience in the UPL market, having been active
in that market since STB’s formation in 1952, but at times
has elected to reduce its exposure, for instance substantially
reducing our UPL activity in 2006-08, in response to an
unattractive competitor pricing environment at the time.
We intend to re-enter the UPL market once the risk adjusted
yields available become more attractive.
Business Finance
The Group’s SME lending operations have grown strongly,
as targeted, and I expect further positive progress in 2018
given we started the year with a new business pipeline which
is higher than it has ever been. Total business lending in 2017
increased 31% to £824.0 million (2016: £631.0 million).
Real Estate Finance lending balances increased by 28.8% to
£580.8 million as at 31 December 2017 (2016: £451.0 million).
The bias of this portfolio is 70% weighted in favour of
residential investment finance. We have continued to adopt
a cautious stance towards Central London house building
finance. Outside of Central London demand for property
development finance has remained robust and the units we
have financed have continued to sell well, in a number of
cases faster and for higher values than originally expected.
The average LTV across the whole portfolio remains less
than 60%.
Secure Trust Bank Commercial Finance, the invoice finance
division of the Bank, has had a good year and has now
funded over £1 billion of customers’ invoices. Excluding the
systemic banks, by size we are now the 5th largest operator
in the invoice finance market but given the fragmented nature
of the market we have substantial opportunities to continue
to grow very strongly in this sector. This is evidenced by
customer lending balances, which net of provisions grew 101%
to £126.5 million at 31 December 2017 (2016: £62.8 million).
I continue to believe we have one of the most capable teams
of invoice financiers in the UK, supported by a scalable
modern IT platform. This, coupled with Group management’s
experience in SME and corporate lending, gives STB a
distinct advantage when it comes to structuring transactions
and responding rapidly to opportunities.
In Asset Finance we continued to enjoy a good strategic
partnership with Haydock Finance during 2017. I disclosed
within the CEO’s statement in the 2017 interim accounts
that we had adopted a more cautious risk appetite in Asset
Finance. Customer lending balances, originated by Haydock
Finance Limited but written by STB and fully conforming to
STB’s credit policies have remained flat over the last year
at £116.7 million compared to £117.2 million a year ago.
In December 2017 it was announced that manager owners
of Haydock had sold a controlling stake to funds managed
by Apollo Global Management. This transaction completed
in January 2018. We are in discussion with Haydock about
the effect of the change of control on our relationship.
10
Operational Highlights
Strategic Report
Corporate Governance Report
Financial Statements
New Business Volumes:
Real Estate Finance £286.5m
Asset Finance
£50.9m
Commercial Finance £52.6m
Retail Finance
£520.0m
Motor Finance
£142.8m
Consumer
Mortgages
Other
Total:
£16.4m
£7.9m
£1,077.1m
Loans & Advances to
Customers:
Real Estate Finance £580.8m
Asset Finance
£116.7m
Commercial
Finance
£126.5m
Retail Finance
£452.3m
Motor Finance
£274.6m
Consumer
Mortgages
Other
Total:
£16.5m
£30.9m
£1,598.3m
£1,598.3m
Loans & Advances to Customers
2016: £1,321.0m
2015: £1,074.9m
Customer base continues to increase and customer
satisfaction levels remain very positive
Across our chosen markets we are serving a record number
of customers (989,528), an increase of 33% on the total
customer base of 742,974 as at 31 December 2016,
excluding discontinued operations.
Customer satisfaction is measured in a number of ways.
It is reassuring, that 2017 has once again seen us
consistently achieve customer satisfaction ratings in excess
of 90% across all of our products as measured by FEEFO.
We also use Net Promoter Scores to assess our customer
service and these scores exhibit similar positive trends to
those derived from FEEFO.
I am delighted to confirm that for the fifth year running we
have retained the Customer Service Excellence standard.
This standard was introduced by the Cabinet Office in
2010 to replace the Kite Mark. This indicates our customer
service has been judged to meet Government standards of
excellence which are benchmarked against high-performing
organisations. The final report made particular reference
to the professionalism of our staff, commenting on their
openness and positivity about working for STB, as well as
citing the work we do for our vulnerable customers and the
initiatives we have implemented during 2017 to improve
our customer experience. I heartily congratulate my
colleagues on this fantastic achievement and echo the
Chairman in thanking all of our colleagues for their
customer focus and professionalism during a year of very
significant change.
Fee based accounts
As expected, the legacy OneBill product which closed for
new business in 2009, continues to see customer numbers
decline over time. Customer numbers fell to 18,963 by
31 December 2017 compared to 19,995 a year earlier.
Debt Managers Services (‘DMS’)
The markets for those debt collection agencies fully
authorised by the Financial Conduct Authority improved
further in 2017 as more operators exited the market or
were consolidated within larger entities. These attributes
translated into more opportunities for DMS in the third
party debt collection and portfolio acquisition spaces
during 2017. Overall, the profit before tax of £0.6 million
in 2017 was well above the £0.2 million recorded for the
prior year.
www.securetrustbank.co.uk
11
Secure Trust Bank PLC Annual Report & Accounts 2017
Straightforward transparent banking
Chief Executive’s statement
continued
Our long-term ambition
remains to grow a broad
based portfolio, balanced
across consumer finance,
SME finance and residential
mortgage lending.
Competitive and regulatory environment
In my annual statement last year I was optimistic about the
potential that action by regulators could help to improve
the competitive positioning of smaller banks in the UK.
I am therefore pleased to say that the changes to the capital
regulations announced by the Basel Committee on Banking
Supervision in December 2017 are welcomed by the Group.
The primary changes relate to a) the introduction of more
risk sensitivity into the risk weights used in the standardised
approach (the approach usually adopted by smaller banks)
and b) the imposition of a capital floor whereby the outputs
generated by larger banks using the Internal Ratings Based
approach will be floored at 72.5% of the risk weights used
under the standardised approach.
To put the scale of these changes into context, I should
note that as matters currently stand the differing capital
approaches allow IRB banks to hold significantly less capital
than a smaller competitor for taking the exact same risks.
These differences can be 500%+ and are most pronounced
in the residential mortgage market and to a lesser extent the
Buy to Let (BTL) market. It is evident that the revisions
announced, once fully implemented will largely remove the
substantial capital advantages enjoyed by the systemic banks
in certain lending classes. This is especially so in the
mortgage markets referred to above.
At the macro level it is apparent that the regulatory direction
of travel is to reduce the capital differentials between the
systemic and non-systemic firms which should ultimately
bode well for smaller banks. It should also benefit consumers
and SMEs by fostering competition thereby creating more
innovation and choice and reducing the risks that the
taxpayer will need to fund the bail out of failed banks in
the future.
12
Strategic priorities
The benefits of the Group’s three strategic priorities of:
(i) organic growth, (ii) diversification and (iii) M&A activity
were very clear last year. The broad based diversification
in the lending portfolios ensured that we were able to
undertake a significant strategic repositioning of our risk
profile while increasing the overall customer lending balances
year on year by 21% and growing statutory pre-tax profits
by 32% (on a continuing basis).
The focus for 2018 is on
1. Organic growth in responsible lending across a diverse
portfolio of attractive segments
2. Continued investment in broadening our product offerings
to customers
3. Pursuing M&A activity on an opportunistic basis
4. Optimising our capital and liquidity strategies
5. Continuing to target delivering profit growth in the
medium term to create shareholder value
Our long-term ambition remains to grow a broad based
portfolio, balanced across consumer finance, SME finance
and residential mortgage lending.
We will continue to grow our Retail Point of Sale (V12)
and Motor propositions in the Consumer Finance sector.
V12 has delivered five years of record balance sheet and
profit growth since being acquired in January 2013.
Whilst now a top five player it has a modest market share
and considerable potential to continue growing our lending
balances which are relatively short term in duration and prime
in nature. In addition to writing loans on our own account,
V12 will extend the number of retailer relationships benefitting
from the dual lending panel scheme which was initially
launched with AO.com in Q3 2017.
The market for Motor Finance in the UK is nearly £20 billion.
This is a highly fragmented and competitive space where
we have a £0.25 billion share predominantly in non-prime
lending. This is an important and profitable line of business
for us. We see opportunities to continue to grow our
non-prime lending. However we also wish to extend our
proposition to target the prime section of the market served
by other specialist lenders which we estimate is several
£bn in scale. It is readily apparent that the lenders in this
space enjoy attractive returns on equity. In January 2018 the
new Managing Director and Finance Director for our Motor
Finance business commenced their roles and they have been
tasked with improving the profitability of the near prime
motor business whilst developing our strategy to enter the
prime market and grow a sizable business in this space over
the next 3-5 years.
Strategic Report
Corporate Governance Report
Financial Statements
We remain committed to supporting the Government policy
of building more new homes. Our activities in this space in
2017 were negatively impacted by the 50% increase in the
risk weights applied to the capital requirements imposed
on all small banks in December 2016. The need to increase
lending margins to offset the higher capital costs dampened
borrower demand for our development finance loans in
2017. We are exploring ways to address these dynamics.
Our Loan to Gross Development Value limits will remain
modest to ensure that the borrower has hard equity in any
deal and to provide a buffer lest market values fall.
The UK invoice finance and asset finance markets are large,
fragmented and growing markets of around £20 billion each.
We are pleased with the progress made by STB Commercial
Finance. We see significant future growth potential and would
be interested in acquiring businesses in these spaces if the risk
profile and economics of any transaction are attractive.
The mortgage market is exhibiting greater pricing pressures
at the moment which I attribute to many lenders seeking to
maximise utilisation of the TFS scheme prior to its closure for
new lending in February 2018. As we progress through 2018
I expect pricing pressures will ease which will allow us to
compete more effectively. As previously disclosed the
creation of this new business operation involves up-front
investment and attractive returns on equity will take time to
materialise whilst we work through the front book: back book
dynamic that is a prominent feature of mortgage lending.
The Basel Committee changes referred to above should,
in time, have a positive effect on returns for lower LTV
lending undertaken by smaller banks.
We are seeking to negate the ‘J’ curve effect via acquisition
of existing mortgage lenders and/or portfolios which offer
acceptable risk and economic profiles. During 2017 we
engaged in a number of discussions relating to inorganic
business opportunities but these did not progress to a
conclusion that was acceptable to us. Our previous M&A
activities have generated considerable shareholder value due
in part to the discipline that we apply. We will continue to be
disciplined in our approach to opportunities. It is noteworthy
that many of the portfolios currently available relate to
second charge lending. This is an area where some market
practices have drawn regulatory focus and is not a part of
the market we wish to operate in.
The Board reviews the Group’s capital structure on an
ongoing basis and will explore options to optimise the capital
base, which could include the raising of Alternative Tier 1 or
Tier 2 capital, subject to market conditions and the Board
determining that it is advantageous to do so. The Group’s
ongoing strategy is to significantly grow its lending operations.
Current trading and outlook
We are pleased with the new business momentum which has
continued to build as the first quarter progressed and there
has been no material change to the underlying performance
of the business in the early months of 2018. All of the leading
indicators suggest the changes made during 2017 in respect
of motor finance credit underwriting and policy will deliver
the expected improvements in impairments going forward.
As such, we continue to see potential to grow our lending
portfolio in line with our ambition.
I am pleased with the revisions made by the Basel Committee
in respect of the capital requirements of smaller lenders
relative to the systemic firms. Whilst it will take time for the
benefits of these changes to be realised, it bodes well for
smaller firms.
On one hand the UK faces a period of heightened economic
uncertainty with weak consumer confidence and reduced
levels of business investment. On the other hand current
UK economic fundamentals are solid and the economy is
benefiting from the rising tide being created by stronger
growth in the US, Asia and Europe. With record employment
levels and the prospect of inflation levels subsiding as the
effects of the recent appreciation of sterling against the
dollar begin to flow through, there are certainly grounds for
optimism. It seems likely that the catalyst for a rebound in
consumer and business confidence which will drive higher
GDP growth will be a positive outcome in the negotiations
for the UK’s exit from the EU.
Our approach to the market reflects evolving economic
conditions and our credit appetite will be kept under review.
The benefits of our strategic repositioning should be more
visible as we progress through 2018 as the drag effects of
the run off sub-prime motor book and the investment in new
business operations such as mortgages and the deposit
platform ease whilst the SME activities continue to grow.
Our long term strategic objective is to be active in Consumer
Credit, SME Finance and Mortgage Lending. This enables
flexibility to restrict lending in areas which may be overheating
as demonstrated in 2017 and instead allocate capital for
more sustainable risk adjusted returns. Notwithstanding the
current uncertain economic outlook, I believe there remains
considerable scope to pursue our strategic priorities by
developing the business model organically and pursuing
attractive acquisition opportunities.
Paul Lynam
Chief Executive Officer
21 March 2018
www.securetrustbank.co.uk
13
Secure Trust Bank PLC Annual Report & Accounts 2017
Straightforward transparent banking
Financial review
Summarised income statement
Underlying profit reconciliation
Interest, fee and commission income
Interest, fee and commission expense
Operating income
Impairment losses
Operating expenses
Profit on sale of NSF shares
Profit before tax
Underlying adjustments to profit (see below)
Underlying profit before tax (including PLD)
Discontinued operations - PLD
Total underlying adjustments to profit
Underlying profit before tax
Underlying tax
Underlying profit after tax
Underlying basic earnings per share (pence)
Statutory results
Profit before tax
Tax
Profit after tax
Gain recognised on disposal after tax
Profit for the period
2017
Continuing
operations
£million
2017
Discontinued
operations
£million
2017
Total
£million
2016
Continuing
operations
£million
2016
Discontinued
operations
£million
157.3
(27.8)
129.5
(33.5)
(71.3)
0.3
25.0
2.0
27.0
–
2.0
27.0
(5.5)
21.5
116.4
25.0
(5.1)
19.9
–
19.9
8.0
–
8.0
(3.4)
(0.3)
–
4.3
–
4.3
(4.3)
(4.3)
–
–
–
–
4.3
(0.8)
3.5
0.4
3.9
165.3
(27.8)
137.5
(36.9)
(71.6)
0.3
29.3
2.0
31.3
(4.3)
(2.3)
27.0
(5.5)
21.5
135.1
(28.1)
107.0
(23.3)
(64.3)
–
19.4
7.9
27.3
–
7.9
27.3
(6.7)
20.6
116.4
113.0
29.3
(5.9)
23.4
0.4
23.8
2016
Total
£million
157.5
(28.2)
129.3
(30.3)
(71.5)
–
27.5
5.4
32.9
(5.6)
(0.2)
27.3
(6.7)
20.6
113.0
27.5
(6.8)
20.7
116.8
137.5
754.1
0.9
(0.7)
0.2
3.4
1.4
3.5
–
(0.8)
–
(2.5)
5.4
22.4
(0.1)
22.3
(7.0)
(7.2)
–
8.1
(2.5)
5.6
(5.6)
(8.1)
–
–
–
–
8.1
(1.6)
6.5
116.8
123.3
676.2
–
–
–
–
–
–
–
–
–
(2.5)
(2.5)
19.4
(5.2)
14.2
–
14.2
77.9
0.9
(0.7)
0.2
3.4
1.4
3.5
–
(0.8)
–
–
7.9
Basic earnings per share (pence)
107.7
21.1
128.8
Underlying adjustments to profit
Fair value amortisation
Share based incentive scheme
Net Arbuthnot Banking Group management
recharges
Transformation costs
Costs of moving to Main Market
Bonus payments made in respect of ELG sale
Other bonus payments
Other items relating to ELG sale
Profit on sale of NSF plc shares
Discontinued operations - ELG
Underlying adjustments to profit
0.9
–
–
0.8
–
–
0.6
–
(0.3)
–
2.0
–
–
–
–
–
–
–
–
–
–
–
0.9
–
–
0.8
–
–
0.6
–
(0.3)
–
2.0
14
Strategic Report
Corporate Governance Report
Financial Statements
Basis of preparation
The Group uses underlying profit for planning and reporting
purposes, as it improves the comparability of information
between reporting periods. The underlying adjustments to
profit relate to non-controllable items or other items that fall
outside of the Group’s core business activities, as explained
further below:
Fair value amortisation relates to the acquisition of
V12 Finance Group. The acquisition accounting required
identifiable assets and liabilities to be adjusted to their fair
value, and these adjustments are subject to amortisation.
The share based incentive scheme movements have been
driven primarily by market conditions, specifically the
volatility of UK share prices, rather than factors controllable
by the Group. In prior years, this charge related primarily to
directors and was not considered to be part of the Group’s
core business activities. Since the launch of a number of
new share schemes during 2017, these are now more widely
spread across the employees of the Group, and therefore
are now considered to be part of core business activities,
and therefore are not adjusted for in underlying profit.
The adjustment in 2017 in respect of other bonus payments
relates to a long term incentive plan that was set up for a
small number of employees on the creation of the Commercial
Finance business. The scheme is based on profits earned by
that business up to the end of 2019, and is payable in 2020.
Arbuthnot Banking Group management charges will no
longer be levied following the sale of their controlling
interest in the Group, so the adjustment of these items
from underlying profit aids comparability.
Transformation costs comprise the costs of setting up the
Group’s Consumer Mortgage operation and of closing the
current account and unsecured personal lending products.
The move to the Main Market, bonus payments, profit
on sale of Non-Standard Finance plc (NSF) shares and
discontinued activities also represent non-core activities,
which have therefore been adjusted for to derive
underlying profit.
www.securetrustbank.co.uk
15
Secure Trust Bank PLC Annual Report & Accounts 2017
Straightforward transparent banking
Financial review
continued
Discontinued operations
On 13 April 2016 the Group completed the sale of its
branch based non-standard consumer lending business,
the EveryDay Loans Group (ELG), to NSF generating a gain
on disposal of £116.8 million. Results relating to ELG have
therefore been analysed as discontinued operations
throughout these Annual Report and Accounts.
On 21 December 2017 the Group sold a portfolio of
legacy unsecured personal loans (PLD) to Alpha Credit
Solutions 8 S.à.r.l., a company owned by AnaCap Credit
Opportunities III LP. Results relating to the portfolio of
unsecured personal loans have therefore been analysed
as discontinued operations throughout these Annual Report
and Accounts. The profit before tax relating to the unsecured
personal loan portfolio announced shortly after its sale for
the year ended 31 December 2016 and six months ended
30 June 2017, together with its results for the year ended
31 December 2017 on a similar basis, has been adjusted
for statutory purposes in the table at the foot of this page.
Unless otherwise stated, the analyses that follow relate to
continuing operations, which represents all of the Group’s
divisions, excluding ELG and PLD.
Key performance indicators (KPIs)
A summary of the KPIs is set out on page 19 of this Financial
Review. Definitions of the KPIs, their calculation and the
reasons for their use can be found in the Appendix to
the Annual Report on page 183.
For this reporting period, underlying profit before tax
(including PLD) is also presented as, since PLD was disposed
of close to the 2017 year end, this aids comparability with
the prior year.
Interest, fee and commission income
Interest, fee and commission income is made up of interest
receivable, which is predominantly earned on loans and
advances to customers, and fee and commission income,
which consists principally of weekly and monthly fees from
the OneBill, Commercial Finance and Retail Finance
products, and commissions earned on debt collection
activities in DMS.
Interest receivable from continuing operations was
£141.3 million for 2017, increasing by £22.5 million (18.9%)
on 2016, which was driven by the growth of the Group’s loan
books over the year.
Fee and commission income from continuing operations
was £16.0 million for 2017, reducing by £0.3 million (1.8%)
on 2016. The fee income relating to OneBill has continued
to decrease year on year, and no fees were earned on the
current account product during 2017, as these products have
been closed to new business; OneBill in 2009 and current
account in 2015. This income has been replaced by
increasing levels of fees earned on Commercial Finance and
Retail Finance lending, as these books continue to grow.
Interest, fee and commission expense
Interest, fee and commission expense is made up of interest
expense in respect of deposits from customers, and fee and
commission expense, comprising mainly fees and commissions
on the Commercial Finance and Motor products, and
commissions paid on debt collection activities in DMS.
Interest expense was £26.7 million for 2017, increasing by
£0.4 million (1.5%) on 2016. The cost of funding reduced
from 2.5% for 2016 to 1.9% for 2017. This reflects the market
for funding, in which the Group has continued to be able to
replace maturing term deposits with new deposits of the
same tenor, but at a lower rate. In addition a greater
proportion of new fixed bonds have a lower tenor and this
has resulted in the reduction in interest rates of fixed rate
products in the deposit book.
The Group’s net interest margin reduced from 8.7% in 2016
to 8.1% in 2017 as a result of the repositioning to lower risk
lower return lending, partially offset by the reduction
achieved in funding costs.
Fee and commission expense has fallen by £0.7 million
(38.9%). In 2016, this consisted primarily of fees and
commissions relating to the current account product,
which have ceased following the closure of this product.
Unsecured personal loan portfolio: profit before tax
Profit before
tax as
announced
£million
Non-core
items added
back
£million
Internal cost
of funds
added back
£million
Internal
attributable
costs
added back
£million
Statutory
profit
before tax
£million
Year ended 31 December 2017
Six months ended 30 June 2017
Year ended 31 December 2016
2.4
1.3
2.1
–
–
(0.3)
1.5
0.8
2.2
0.4
0.3
1.6
4.3
2.4
5.6
Tax
£million
(0.8)
(0.5)
(1.1)
Statutory
profit
after tax
£million
3.5
1.9
4.5
16
Strategic Report
Corporate Governance Report
Financial Statements
Operating income
Operating income increased by 21% to £129.5 million.
The net revenue margin for 2017 was 9.1% compared with
10.0% for 2016. The gross revenue margin for 2017 was
11.1% compared with 12.7% for 2016. The reductions in
these margins are due to the factors referred to above.
Impairment losses
Impairment losses during the year were £33.5 million
(2016: £23.3 million). This increase is due to the growth of
the business and consequent increase in the size of loans and
advances to customers, and additional impairment provision
in respect of the performance of certain elements of the
Motor Finance back book. This performance is expected
to improve in future years as better quality assets replace
these elements.
The cost of risk for 2017 was 2.4%, compared with 2.2% for
2016. Further analysis of the Group’s loan book and its credit
risk exposures is provided in Notes 10, 12 and 29.
Operating expenses
Operating expenses from continuing operations have
increased, reflecting the investments made in the
infrastructure and staff resources of the Group to achieve
growth targets, from £64.3 million in 2016 to £71.3 million
in 2017. The Group’s cost to income ratio reduced to 55.1%
from 60.1% for 2016.
Underlying profit
On a continuing operations basis, underlying profit before
tax was £27.0 million (2016: £27.3 million). When results
for PLD are included, underlying profit before tax is down
4.9% to £31.3 million (2016: £32.9 million).
Summarised balance sheet
Assets
Cash and balances at central banks
Debt securities held-to-maturity
Loans and advances to banks
Loans and advances to customers
Other assets
Liabilities
Due to banks
Deposits from customers
Other liabilities
Taxation
The effective underlying tax rate has fallen to 20.4% (2016:
24.5%). The effective rate in 2016 was impacted by a prior
period adjustment of £1.8 million. The new Bank Corporation
tax surcharge of 8%, which is effective from 1 January 2016,
would apply to any future taxable profits of Secure Trust Bank
PLC company that were in excess of £25.0 million.
Distributions to shareholders
The directors recommend the payment of a final dividend of
61 pence per share which, together with the interim dividend
of 18 pence per share paid on 29 September 2017, represents
a total dividend for the year of 79 pence per share (2016:
75 pence per share, excluding a special dividend of 165 pence
per share paid following completion of the sale of ELG).
Earnings per share
Detailed disclosures of earnings per ordinary share are
shown in Note 8 to the financial statements. Basic earnings
per share increased by 38.3% to 107.7 pence per share
(2016: 77.9 pence), as a result of the increase in profit after
tax. The underlying basic earnings per share increased by
3.0% to 116.4 pence per share (2016: 113.0 pence per share).
Summarised balance sheet
The assets of the Group increased by 25.3% to
£1,891.6 million, primarily driven by the growth in the
Group’s loan portfolios and overall cash balances.
The Group measures returns against average assets, average
equity and required equity as set out in the KPIs table on
page 19. These ratios have all fallen in comparison to the
prior year. This is as expected as the Group continues to
reposition its lending towards lower risk segments.
The liabilities of the Group increased by 28.9% to
£1,642.5 million, primarily driven by the increase in deposits
from customers, providing funding for the Group’s lending
activities.
2017
£million
2016
£million
226.1
5.0
34.3
1,598.3
27.9
112.0
20.0
18.2
1,321.0
38.8
1,891.6
1,510.0
113.0
1,483.2
46.3
70.0
1,151.8
52.2
1,642.5
1,274.0
www.securetrustbank.co.uk
17
Secure Trust Bank PLC Annual Report & Accounts 2017
Straightforward transparent banking
Financial review
continued
Loans and advances to customers
Loans and advances to customers include secured
and unsecured loans and finance lease receivables.
After excluding the PLD loan book from the prior year
balance sheet, the composition of the 2017 loan book
remains broadly consistent with 2016, with the Consumer
Finance book being approximately 46% of total lending,
and the Business Finance book being approximately 52%.
The nascent Consumer Mortgage business currently
accounts for 1% of total lending.
Loan originations in the year, being the total of new loans
and advances to customers entered into during the year,
increased by 16.4% to £1,077.1 million (2016: £925.3 million).
Almost half of the new business volume (£520.0 million) was
generated by the Retail Finance business. This business has
a shorter term on average than the rest of the book, so this
new business resulted in a year end increase in the Retail
Finance book of £126.4 million (38.8%).
Further analyses of loans and advances to customers,
including a breakdown of the arrears profile of the Group’s
loan books, is provided in Notes 10, 11 and 12.
Deposits from customers
Customer deposits include term, notice and sight
deposits, as well as the Group’s current account and
OneBill products. Customer deposits grew by 28.8%
during the year to close at £1,483.2 million, to fund the
increased lending balances. The Group also held
£113.0 million of borrowings under Bank of England
funding schemes at the year-end, being drawn down
under the Term Funding Scheme.
Loans and advances to customers
2017
2016
Business Finance:
Real Estate Finance £580.8m
Asset Finance
£116.7m
Commercial
Finance
£126.5m
Consumer Finance:
Retail Finance
£452.3m
Motor Finance
£274.6m
Consumer
Mortgages
Other
£16.5m
£30.9m
Total:
£1,598.3m
Business Finance:
Real Estate Finance £451.0m
Asset Finance
£117.2m
Commercial Finance £62.8m
Consumer Finance:
Retail Finance
£325.9m
Motor Finance
£236.2m
Personal Lending
£65.5m
Other
£62.4m
Discontinued operations
and assets held for sale:
Personal Lending
£nil
Total:
£1,321.0m
18
Strategic Report
Corporate Governance Report
Financial Statements
Debt Managers (Services) Limited
Debt Managers (Services) Limited (DMS) is the Bank’s debt
collection business. DMS collects debt on behalf of a range
of clients as well as for group companies. It also selectively
invests in purchased debt portfolios from fellow subsidiary
undertakings and external third parties. DMS was purchased
by the Bank in January 2013, since when it has grown its
number of debts under management to over 300,000.
In 2017 DMS performed well with revenue increasing by
24% from £4.6 million to £5.7 million and profit before tax
increasing significantly from £0.2 million to £0.6 million.
This was achieved through the development of relationships
with new and existing clients and a broadening of service
offerings.
Key performance indicators
The following key performance indicators, stated for
continuing operations, are the primary measures used by
management to assess the performance of the Group:
The Remuneration Report, starting on page 82, sets out
how executive pay is linked to the assessment of key financial
and non-financial performance metrics.
Key Performance Indicators
Financial KPIs:
Margin ratios
Net interest margin
Net revenue margin
Gross revenue margin
Cost ratios
Cost of risk
Cost of funds
Cost to income ratio
Underlying profit
Underlying profit before tax
Underlying profit (including PLD)
Return ratios
Underlying return on average assets
Underlying return on average equity
Underlying return on required equity
Funding ratios
Loan to deposit ratio
Total funding ratio
Non-Financial KPIs:
Customer FEEFO ratings (mark out of 5 based on star rating from 608 reviews
(2016: 400 reviews))
Employee survey engagement score (based on 2017 all staff survey)
Environmental intensity indicator (tonnes carbon dioxide per £1 million group income)
www.securetrustbank.co.uk
2017
2016
8.1%
9.1%
11.1%
2.4%
1.9%
55.1%
8.7%
10.0%
12.7%
2.2%
2.5%
60.1%
£27.0 million
£31.3 million
£27.3 million
£32.9 million
1.3%
8.9%
13.5%
1.6%
9.8%
17.1%
107.8%
115.5%
109.0%
110.4%
4.7
78%
4.2
4.5
85%
5.4
19
Secure Trust Bank PLC Annual Report & Accounts 2017
Straightforward transparent banking
Capital, leverage and liquidity
Capital
The Group’s capital management policy is focused on
optimising shareholder value over the long-term. Capital is
allocated to achieve targeted risk adjusted returns whilst
ensuring appropriate surpluses are held above the minimum
regulatory requirements. The Board reviews the capital
position at every Board meeting.
The Group’s regulatory capital is divided into:
• CET1 which comprises shareholders’ funds, after deducting
intangible assets and deferred tax assets which have arisen
due to losses.
• Tier 2 capital which comprises the collective allowance for
impairment. Under IFRS 9, there is no longer a collective
allowance, and therefore at 1 January 2018 the Group will
not hold any Tier 2 capital.
The Group’s Individual Capital Adequacy Assessment Process
(“ICAAP”) includes a summary of the capital required to
mitigate the identified risks in its regulated entities and the
amount of capital that the Group has available. All regulated
entities within the Group have complied during the financial
year with all of the externally imposed capital requirements
to which they are subject.
The Group operates the standardised approach to credit risk,
whereby risk weightings are applied to the Group’s on and off
balance sheet exposures. The weightings applied are those
stipulated in the Capital Requirements Regulation.
An analysis of CET1 capital can be found in Note 32 to the
financial statements.
Total Risk Exposure has increased by 14.4% to £1,446.1 million
reflecting the significant growth in both Business Finance and
Consumer Finance Lending, and the increase in the risk
weights applied to residential development lending activities
from 100% to 150% as advised by the Bank of England in
December 2016.
The CET1 capital ratio is the ratio of CET1 capital divided by
the Total Risk Exposure. The Group has maintained a robust
CET1 capital ratio and this provides a significant capital
buffer for continued growth.
Leverage
The Basel III framework introduced a relatively simple,
transparent, non-risk based leverage ratio to act as a
supplementary measure to the risk-based capital
requirements. The leverage ratio is intended to restrict
the build-up of leverage in the banking sector to avoid
destabilising deleveraging processes that can damage the
broader financial system and the economy, whilst reinforcing
the risk-based requirements with a complementary simple,
non-risk based ‘backstop’ measure.
The Basel III leverage ratio is defined by the Capital
Requirements Regulation as Tier 1 capital divided by on
and off balance sheet asset exposure values, expressed
as a percentage. The UK leverage ratio framework sets a
minimum ratio of 3.0%, which increased to 3.25% on
1 January 2018.
As shown in the table below, the Bank has a leverage ratio
at 31 December 2017 of 12.3% (31 December 2016: 14.5%),
comfortably ahead of the minimum requirement.
Capital
Capital
CET1 capital
Total Tier 2 capital
Total capital
Total Risk Exposure
CRD IV ratios
CET1 capital (group consolidated)
Leverage Ratio
20
2017
£million
2016
£million
238.9
4.4
243.3
227.4
5.3
232.7
1,446.1
1,264.0
2017
%
16.5
12.3
2016
%
18.0
14.5
Strategic Report
Corporate Governance Report
Financial Statements
Liquidity
The Group continues to manage its liquidity on a
conservative basis by holding High Quality Liquid Assets
and utilising predominantly retail funding from customer
deposits. In December 2012, Secure Trust Bank was
admitted as a participant in the Bank of England’s Sterling
Money Market Operations under the Sterling Monetary
Framework, to participate in the Discount Window Facility.
From July 2013, the Group was permitted to draw down
facilities under the Funding for Lending Scheme. Funding
for Lending Scheme monies were maintained as a liquidity
buffer, above that required to support lending. During 2017,
these borrowings were repaid by the Group, and exposure
to the Funding for Lending Scheme ended. Subsequently,
funds were redrawn for a similar purpose under the new
less expensive Term Funding Scheme.
At 31 December 2017 and throughout the year, the Group
had significant surplus liquidity over the minimum requirements
due to its stock of High Quality Liquid Assets, in the form of
the Bank of England Reserve Account and UK Treasury Bills.
As shown in the table below, total liquid assets increased by
77% from £150.2 million to £265.4 million, with the High
Quality Liquid Assets balance being £231.1 million.
The Group has no liquid asset exposures outside of the
United Kingdom and no amounts that are either past due
or impaired.
The Group’s Liquidity Coverage Ratio (“LCR”), and other
measures used by management to manage liquidity risk,
are described in the Principal Risks and Uncertainties section
of the Strategic Report.
Liquid Assets
Liquid Assets:
Aaa – Aa3
A1 – A3
Unrated
Liquidity Exposures
www.securetrustbank.co.uk
2017
£million
2016
£million
231.1
29.3
5.0
265.4
132.0
13.2
5.0
150.2
21
Secure Trust Bank PLC Annual Report & Accounts 2017
Straightforward transparent banking
Real Estate Finance
Real Estate Finance was formed
as a division within the Group in
2013. The division supports SMEs
in providing finance principally
for residential development and
residential investment.
Asset Finance
Asset Finance was formed as a
division within the Group in
December 2014.
Commercial Finance
Commercial Finance was formed
as a division within the Group in
2014.
Business
Finance
22
Strategic Report – Business Review
Corporate Governance Report
Financial Statements
£824.0m
2017 Total Business Finance Lending
31%
Increase in Business Finance Lending
(2016 – £631.0m)
The Group’s SME
lending operations
have grown strongly.
www.securetrustbank.co.uk
23
Secure Trust Bank PLC Annual Report & Accounts 2017
Straightforward transparent banking
Business review
Business Finance
Real Estate Finance
What we do
Residential Development
The Group lends to enable the development of new build
property, commercial to residential conversions (including
those with permitted development rights) and refurbishment
projects.
Residential Investment
The Group lends on portfolios of residential property where
the rental income will repay the underlying borrowing over a
term period. This excludes the regulated buy to let mortgage
sector.
Other lending
The Group has limited appetite for commercial lending
(either development or investment) and has limited exposure
to mixed development schemes.
How we do it
Financing is typically provided over a term of up to
five years with prudent loan to value targets, with a 60%
Loan to Gross Development Value to residential house
builders. More restrictive policies are implemented from
time to time as required; for instance the Group reduced its
financing of residential developments in Central London in
2015. The Group’s Loan to Gross Development Value / Loan
to Value (“LTV”) ratios average 58% across all lending areas.
The Real Estate Finance team is staffed by experienced
bankers with proven property lending expertise. The team
provides full support to customers and introducers over
the life of the products.
Growth has continued
to be concentrated on
Investment business.
24
Secure Trust Bank has continued to support The Dorchester Group
with the phased development of Heyford Park in Oxfordshire.
Strategic Report – Business Review
Corporate Governance Report
Financial Statements
Looking forward
The business remains committed to growing the book further
in 2018, but remains cautious around credit policy, especially
in the light of more uncertain market conditions. Appetite for
Development business remains and opportunities to mitigate
the capital impact are being investigated, whilst the business
will continue to seek to diversify its geographic and product
mix to bring further balance to the book.
2017 performance
The Group has continued to grow its Real Estate Finance
business during 2017, with balances up 29% in the year.
Growth has continued to be concentrated on Investment
business, which grew by 47%, whilst Development lending
fell by 2% in the year. This reflected repayments on a number
of high-value developments in London, all of which repaid
in full, and the impact of higher capital requirements on
Development lending, which has limited the amount of new
lending the Group was prepared to write. The lower yielding
Investment book now represents 72% of the overall portfolio,
and this change in product mix explains the lower level of
growth in lending revenues in the year compared to balance
growth. The increase in balances has not been at the expense
of credit quality, with the overall LTV ratio reducing by 1%
in the year. No specific losses have occurred, enabling the
Group to reduce the overall level of provisions by £0.2 million
compared to 2016.
Revenue and lending performance vs prior years
ꢀ32.3ꢁ
2ꢂ17
ꢀ28.4ꢁ
2ꢂ16
ꢀ2ꢂ.3ꢁ
2ꢂ15
ꢀ58ꢁ.8ꢂ
2ꢁ17
ꢀ451.ꢁꢂ
2ꢁ16
ꢀ368.ꢁꢂ
2ꢁ15
ꢀꢁꢂ.2ꢃꢄ
2ꢂ17
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2ꢂ16
ꢀꢅꢆl
2ꢂ15
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leꢇꢉꢆꢇꢊ ꢋeꢌeꢇꢍe
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ꢋalaꢇꢈe at 31 ꢌeꢈeꢂꢋeꢍ
ꢇeal ꢈstate ꢉꢆꢅaꢅꢊe
ꢆꢄꢋaꢆꢌꢄeꢅt ꢁꢍaꢆꢅsꢃꢎlosses
www.securetrustbank.co.uk
25
Secure Trust Bank PLC Annual Report & Accounts 2017
Straightforward transparent banking
Business review
Business Finance
Asset Finance
What we do
The Asset Finance business provides funding to support
SME businesses in acquiring commercial assets, such as
building equipment, commercial vehicles and manufacturing
equipment.
How we do it
The Asset Finance business is operated via a strategic
partnership with Haydock, a well-established asset finance
company operating across the UK. Haydock provides a full
business process outsourcing service to the Group and also
assists the Group in sourcing new business and providing
support to the Group’s clients on an ongoing basis. All of the
lending written fully conforms to the Group’s credit policies,
risk appetite or other specific authorisations.
The current route to market is via introducers. The Group
offers hire purchase and finance lease arrangements with
terms of up to five years.
2017 performance
The business took the decision in the second half of 2016
to limit its exposure to some SME markets. Accordingly,
the level of new business written in 2017 was lower than in
2016, with the overall lending ending broadly flat against the
prior year. Income was 9% higher reflecting higher average
balances over the year. The business saw lower overall yields
in 2017, reflecting the impact of market conditions.
Impairment losses increased by £0.4 million in the year.
The overall book quality remained strong, with arrears
balances reducing to 2.5% of the book at 31 December 2017
compared to 4.3% at 31 December 2016.
Looking forward
The Asset Finance division has operated through a
partnership with Haydock Finance to date. With the sale
of the Haydock business confirmed on 31 January 2018,
the business is currently assessing future options.
Revenue and lending performance vs prior years
ꢀ8.5ꢁ
2ꢂ17
ꢀ7.8ꢁ
2ꢂ16
ꢀ2.4ꢁ
2ꢂ15
ꢀ116.7ꢁ
2ꢂ17
ꢀ117.2ꢁ
2ꢂ16
ꢀ7ꢂ.7ꢁ
2ꢂ15
ꢀ1.ꢁꢂ
2ꢁ17
ꢀꢁ.6ꢂ
2ꢁ16
ꢀꢃꢄl
2ꢁ15
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leꢆꢈꢅꢆꢉ ꢊeꢋeꢆꢌe
ꢃsset ꢄꢅꢆaꢆꢇe leꢆꢈꢅꢆꢉ
ꢊalaꢆꢇe at 31 ꢋeꢇeꢁꢊeꢌ
ꢅsset ꢆꢄꢃaꢃꢇe
ꢄꢂꢈaꢄꢉꢂeꢃt losses
26
Strategic Report – Business Review
Corporate Governance Report
Financial Statements
2017 performance
The Commercial Finance business continued to drive strong
growth, with lending balances more than doubling in the
year. Income also grew strongly against a marginal increase
in costs. Impairment losses continue to be minimal.
Alongside this excellent performance, the business has
continued to focus on its infrastructure. The recruitment of
a number of high calibre people has led to a significant
strengthening of the team.
Looking forward
The team has built a reputation for high quality service,
particularly within the market sectors that the Group is
focusing on. As a result, the prospects for future growth
are encouraging. To augment this, Commercial Finance is
intending to develop a regional footprint which will provide
the Group with a more scalable business model.
Commercial Finance
What we do
The division specialises in providing a full range of invoice
financing solutions to UK businesses including invoice
discounting and factoring.
Invoice discounting services provide access to funding and
release typically up to 90% of the value of qualifying invoices,
in confidence and allowing clients to stay in control of sales
ledger management.
Factoring services, where the sales ledger management is
passed onto the Group, may also provide access to funding
of typically up to 90% of the value of qualifying invoices
and often results in the Group managing credit control,
cash allocation, statement and reminder letter distribution.
Other assets can also be funded either long or short term and
for a range of loan to value ratios alongside other facilities.
How we do it
Commercial Finance complements the broader SME lending
proposition which has been developed by the Group. The
business also provides SME commercial owner occupiers with
finance to buy the property they trade from in conjunction
with other financing facilities.
The division has built a strong team of proven business
development, credit and operational professionals who
have delivered a robust and compliant operational model.
Revenue and lending performance vs prior years
ꢀ7.2ꢁ
2ꢂ17
ꢀ4.6ꢁ
2ꢂ16
ꢀ1.6ꢁ
2ꢂ15
ꢀ126.5ꢁ
2ꢂ17
ꢀ62.8ꢁ
2ꢂ16
ꢀ29.3ꢁ
2ꢂ15
ꢀꢁ.1ꢂ
2ꢁ17
ꢀꢁ.2ꢂ
2ꢁ16
ꢀꢁ.3ꢂ
2ꢁ15
Lending
balances more
than doubling
in the year.
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leꢈꢉꢆꢈꢊ ꢄeꢋeꢈꢌe
ꢃoꢁꢁeꢄꢅꢆal ꢇꢆꢈaꢈꢅe leꢈꢉꢆꢈꢊ
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ꢃoꢂꢂeꢄꢅꢆal ꢇꢆꢈaꢈꢅe
ꢆꢂꢉaꢆꢄꢂeꢈt losses
www.securetrustbank.co.uk
27
Secure Trust Bank PLC Annual Report & Accounts 2017
Straightforward transparent banking
Consumer
Finance
Retail Finance
Retail Finance includes lending
products for in-store and online
retailers to enable consumer
purchases.
Motor Finance
Finance is arranged through
motor dealerships and brokers
and involves fixed rate, fixed term
hire purchase arrangements,
predominantly on used cars.
28
Strategic Report – Business Review
Corporate Governance Report
Financial Statements
£726.9m
2017 Total Consumer Finance lending
29%
Increase in Consumer Finance lending
(2016 – £562.1m excluding Personal Lending)
Running off higher margin/
higher risk portfolios.
www.securetrustbank.co.uk
29
Secure Trust Bank PLC Annual Report & Accounts 2017
Straightforward transparent banking
Business review
Consumer Finance
Retail Finance
What we do
The Bank’s Retail Finance business provides unsecured,
prime lending products to the UK customers of its retail
partners to facilitate the purchase of a wide range of
consumer products across in-store, mail order and online
channels. This business is now driven by V12 Retail Finance,
which was acquired in 2013 and has provided finance in
cooperation with its retail partners for more than 20 years.
The V12 point of sale system is used by the Group’s
retail partners and Retail Finance is administered in
V12 Retail Finance’s offices in Cardiff.
Retail Finance products are unsecured, fixed rate and fixed
term loans of up to 84 months in duration with a standard
maximum loan size of £25,000. The average new loan is
for £1,000 over a 24 month term. Lending is restricted to
UK residents who have a good credit history and can
demonstrate that they can afford to repay the loan.
The finance products are either interest bearing or have
promotional credit subsidised by retailers, allowing
customers to spread the cost of purchases into more
affordable monthly payments.
How we do it
The Group operates an online eCommerce service to
retailers, providing finance to customers through an online
paperless processing system. This includes allowing
customers to digitally sign their credit agreements, thereby
speeding up the pay-out process, and removing the need to
handle and copy sensitive personal documents through
electronic identity verification.
The Group serves retailers across a broad range of retail
sectors including cycle, music, furniture, outdoor/leisure,
electronics, dental, jewellery, home improvements and
football season tickets.
The Group provides finance to customers of a large number
of retailers including household names such as Evans Cycles,
AO.com, Jessops, Halfords, DFS, Sofology and Watchfinder.
The Group plans continued
growth in Retail Finance
during 2018.
30
The Group serves retailers across a broad range of retail sectors.
Strategic Report – Business Review
Corporate Governance Report
Financial Statements
2017 performance
The Retail Finance business has continued to grow strongly,
with new gross lending volumes increasing to £520.0 million
(an increase of 31% on the previous year). This has driven a
further significant increase in lending assets, which during the
year rose to £452.3 million (December 2016: £325.9 million).
Looking forward
The Group plans continued growth in Retail Finance during
2018 with the focus on acquiring increased market share
across its target markets including cycle, music, furniture,
outdoor/leisure, electronics, dental, jewellery, home
improvements and football season tickets.
Each of the three largest sub-markets for the business (sports
and leisure, furniture and consumer electronics) have
contributed to this growth, which as in previous years has
been achieved through a combination of gaining increased
market share and sector growth. In addition, Furniture and
Jewellery finance have seen positive new business levels
influenced by the introduction of new retailers into the Retail
Finance portfolio.
Lending revenue increased by 38% to £50.7 million
(2016: £36.7 million). Impairment losses were well
controlled at £13.8 million (2016: £9.5 million).
To underpin the continued growth, the Group continues to
invest in initiatives to further enhance its systems capabilities,
to ensure that quality of service to both retailers and
customers is maintained or improved. This includes the
continued expansion of its Retail Finance workforce.
Revenue and lending performance vs prior years
ꢊ5ꢋ.7ꢌ
2ꢋ17
ꢊ36.7ꢌ
2ꢋ16
ꢊ24.2ꢌ
2ꢋ15
ꢀ452.3ꢁ
2ꢂ17
ꢀ325.9ꢁ
2ꢂ16
ꢀ22ꢂ.4ꢁ
2ꢂ15
ꢀ13.8ꢁ
2ꢂ17
ꢀ9.5ꢁ
2ꢂ16
ꢀ5.2ꢁ
2ꢂ15
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leꢃꢅꢁꢃꢆ ꢇeꢈeꢃꢉe
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ꢊalaꢆꢇe at 31 ꢋeꢇeꢁꢊeꢌ
ꢃetaꢄl ꢅꢄꢆaꢆꢇe
ꢄꢁꢈaꢄꢉꢁeꢆt losses
www.securetrustbank.co.uk
31
Secure Trust Bank PLC Annual Report & Accounts 2017
Straightforward transparent banking
Business review
Consumer Finance
Motor Finance
What we do
The Group’s Motor Finance business began lending in 2008
under the Moneyway brand and provides hire purchase
lending products to a wide range of customers including
those who might otherwise be declined by other finance
companies. This helps the Group’s customers to gain the
freedom and flexibility that motoring gives to their lives as
well as helping introducers to sell more cars.
2017 performance
The Motor Finance business saw a reduction in new business
volume from £146.8 million in 2016 to £142.8 million in 2017.
The business narrowed its credit parameters during 2017 in
order to reduce potential future impairment losses. During
the period the business stopped offering a product in the
prime market sector; however the business is examining ways
of repositioning a prime offer in the future.
Motor Finance agreements are secured against the vehicle
being financed.
As the Group is lending into the near-prime market the
majority of vehicles financed are predominantly volume
franchise used cars.
How we do it
The Bank distributes its Motor Finance products via UK
motor dealers, brokers and internet introducers. New dealer
relationships are established and managed by our UK-wide
Motor Finance sales team with all introducers subject to a
strict vetting policy, which is reviewed on a regular basis.
The technology platform used allows Moneyway to receive
applications online from its introducers, to provide an
automated decision, document production through to
pay-out to dealer and ongoing in-life management.
Motor lending is administered in the Group head office in
Solihull; however the UK motor dealers and brokers are
UK-wide.
Lending performance vs prior years
ꢊ47.1ꢋ
2ꢌ17
ꢊ4ꢌ.5ꢋ
2ꢌ16
ꢊ33.3ꢋ
2ꢌ15
ꢋ274.6ꢊ
2ꢌ17
ꢋ236.2ꢊ
2ꢌ16
ꢋ165.7ꢊ
2ꢌ15
Impairment losses for the year increased from £14.6 million
to £20.8 million reflecting the performance of the sub-prime
motor lending discontinued during 2017. The Motor Finance
leadership has increased levels of resource and delivered
process improvement throughout 2017 within the Collections
and Recoveries teams.
Lending assets to customers increased by 16% during the
year and lending revenue grew by 16% to £47.1 million.
ꢀ2ꢁ.8ꢂ
2ꢁ17
ꢀ14.6ꢂ
2ꢁ16
ꢀ7.3ꢂ
2ꢁ15
Shift in
business mix
towards lower
risk lending.
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leꢄꢆꢃꢄꢇ ꢁeꢈeꢄꢉe
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ꢃotoꢄ ꢅꢆꢇaꢇꢈe
ꢆꢂꢉaꢆꢄꢂeꢇt losses
32
Strategic Report – Business Review
Corporate Governance Report
Financial Statements
Looking Forward
The Motor Finance business is developing initiatives to
enhance system capabilities and to deliver a broader range
of products. This is expected to improve the credit quality
of the portfolio and drive business growth.
Alongside these initiatives, the business will continue to
focus on the non-prime market sector through its existing
introducer channel. Following the narrowing of its credit
parameters in 2017 the shift in business mix towards lower
risk lending is expected to continue driving improvements
in overall portfolio quality.
To further support strategic development, the business has
made some key appointments to the Motor management
team and will continue to strengthen the depth and
experience of the team as the business expands.
Personal Lending
Personal unsecured loans are fixed rate, fixed term products
with payments received monthly in arrears. Loan terms are
between 12 months and 60 months with advances varying
from £1,000 to £15,000. Loans were provided to customers
for a variety of purposes including home improvements,
personal debt consolidation and for the purchase of vehicles.
In January 2017, the Group announced its intention to cease
originating new personal loans and this segment closed to
new business. On 21 December 2017, the Group sold the
remaining loan portfolio to Alpha Credit Solutions.
2017 performance
Lending revenue declined as expected given the run-off of
the book. A profit before tax of £0.5 million was generated
on the sale of the portfolio.
Looking forward
The Group continued to administer the portfolio in the
early part of 2018, until the completion of the migration of
the portfolio to a third party administrator appointed by the
purchaser. The market will continue to be monitored and
the Group will consider re-entering it once returns are better
aligned with risk.
Revenue and lending performance vs prior years
ꢉ8.ꢊꢋ
2ꢊ17
ꢉ11.2ꢋ
2ꢊ16
ꢉ17.2ꢋ
2ꢊ15
ꢋꢂꢅl
2ꢌ17
ꢋ65.5ꢊ
2ꢌ16
ꢋ74.3ꢊ
2ꢌ15
ꢀ3.4ꢁ
2ꢂ17
ꢀ4.4ꢁ
2ꢂ16
ꢀ4.8ꢁ
2ꢂ15
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at 31 ꢉeꢈeꢊꢇeꢁ
ꢃeꢄsoꢅal ꢆeꢅꢇꢈꢅꢉ
ꢈꢁꢊaꢈꢄꢁeꢅt losses
www.securetrustbank.co.uk
33
Secure Trust Bank PLC Annual Report & Accounts 2017
Straightforward transparent banking
• .
Consumer
Mortgages
Consumer Mortgages was
launched on 20 March 2017.
The division supports residential
customers who are underserved
by the traditional high street
lenders.
34
Strategic Report – Business Review
Corporate Governance Report
Financial Statements
• .
£16.5m
2017 Total Mortgage lending
Compliant, scalable
business with excellent
customer service.
www.securetrustbank.co.uk
35
Secure Trust Bank PLC Annual Report & Accounts 2017
Straightforward transparent banking
Business review
Consumer Mortgages
What we do
The Group lends to individuals who wish to purchase
a property or remortgage their current property.
How we do it
The UK has approximately 4.6 million self-employed and
contract workers. In addition, there is a growing population
of individuals with complex income and recently restored
credit history. These potential customers have been
underserved by traditional high street lenders whose
operating models are based on high volumes of simple,
straight forward cases. Consumer Mortgages provide,
through intermediaries, competitive fixed rate mortgage
products to people whose personal circumstances do not
fit the norm but are still credit worthy individuals with good
affordability.
Financing is typically provided over a term of up to
35 years with fixed interest rate periods of 2, 3 and 5 years.
The Group’s purchase and remortgage products currently
have a maximum loan to value of 85% and a maximum loan
size of £2 million.
The Consumer Mortgage team is staffed by experienced
mortgage and banking individuals with proven property
lending expertise and underwriting skills. The team provides
full support to customers and introducers over the life of the
products.
Revenue and lending performance vs prior years
ꢋꢌ.1ꢃ
2ꢌ17
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2ꢌ16
ꢋꢁꢉl
2ꢌ15
ꢌ16.5ꢃ
2ꢍ17
ꢌꢁꢈl
2ꢍ16
ꢌꢁꢈl
2ꢍ15
ꢀꢁꢂl
2ꢃ17
ꢀꢁꢂl
2ꢃ16
ꢀꢁꢂl
2ꢃ15
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ꢇeꢁꢈꢉꢁꢆ ꢄeꢊeꢁꢂe
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ꢄoꢁsꢅꢆeꢇ ꢈoꢇtꢉaꢉes
ꢂꢆꢊaꢂꢇꢆeꢁt losses
36
Strategic Report – Business Review
Corporate Governance Report
Financial Statements
2017 performance
Since launch the business has grown steadily whilst testing
systems and processes to ensure they are resilient. The 2017
emphasis on building a compliant scalable business with
excellent customer service has put the Group in a good
position to grow the business in 2018.
Looking forward
Consumer Mortgages has steadily built out its distribution
partners and the plan is to continue to expand through 2018;
in January 2018 the business launched with Legal and
General, the largest mortgage club in the UK. Additionally
the Group is looking to extend its product range and
proposition to customers that are underserved and who are
aligned to STB’s target market.
The Group is looking to extend its product range and proposition to
customers that are underserved and who are aligned to STB’s target market.
www.securetrustbank.co.uk
37
Secure Trust Bank PLC Annual Report & Accounts 2017
Straightforward transparent banking
Savings
The Group undertakes its
funding primarily via retail
savings; attracting balances
with competitive rates of interest
advertised on best buy tables
and applied for and serviced
online with UK based telephone
support.
38
Strategic Report – Business Review
Corporate Governance Report
Financial Statements
£1,483.2m
2017 Total customer deposits
29%
Increase in total customer deposits
(2016 – £1,151.8m)
The Group is able to offer
competitive rates and has
been successful in attracting
high volumes of deposits.
www.securetrustbank.co.uk
39
Secure Trust Bank PLC Annual Report & Accounts 2017
Straightforward transparent banking
Business review
Savings
What we do
The Group’s retail savings consist primarily of notice accounts
and fixed term savings, with a small proportion of instant
access accounts, available to individuals as well as private
businesses. Individuals and business accounts are separately
priced to reflect differences in the operational risks and costs.
Accounts are simple in design with savings covered by the
UK Financial Services Compensation Scheme up to the
specified limits.
The key terms of accounts that are usually offered from time
to time are summarised below:
• Mixture of products ranging from 90 to 180 day notice
periods and one to five year fixed term savings.
• Minimum balance of £1,000.
• Maximum balance of £1 million for sole account holders
and £2 million for business and joint accounts.
• Annual interest on fixed term accounts, quarterly on notice
accounts, with the option to capitalise onto the existing
account or pay away for income.
The OneBill account had been in operation for many years
and was designed to aid customers with their household
budgeting and payments process. Customers provided the
Group with details of their annual bills (including rent, utility
bills, insurance and telephone line rental) which the Group
aggregated and then calculated a fixed weekly or monthly
payment schedule to ensure the bills were paid on time.
This enabled customers to spread the cost of their bills
throughout the year in addition to receiving direct debit
discounts and all supplier contact being handled by the
Group. The Group charges a monthly fee for this service.
The product was closed to new customers in 2009.
How we do it
By virtue of the absence of a branch network, a policy of not
cross-subsidising loss making products with profitable ones
and an operational model based on digital self-service,
the Group is able to offer competitive rates and has been
successful in attracting high volumes of deposits, particularly
in short timescales, from a wide range of customers. This
provides a funding profile which gives additional financial
security to the business.
The Group enters the market for deposits as and when it is
necessary and maintains a funding strategy of broadly
matching the term and tenor of its customer savings to the
desired maturity profiles of the Group which are primarily
determined by the interest rates and terms offered on loans
and advances to customers. This strategy seeks to help
mitigate maturity transformation and interest basis risks.
The marketing methods employed include providing
information about the savings accounts offered on price
comparison websites (for example Moneysupermarket),
newspaper best buy tables and articles and via online
endorsement (for example Money Saving Expert). In addition
to attraction based on interest rate, customers choose
Secure Trust Bank based on its financial standing,
UK based operation and high standards of cyber and
operational security.
Customers choose
Secure Trust based on its
financial standing, UK based
operations and strong cyber
and operational security.
40
The Group successfully implemented a new IT platfrom.
Strategic Report – Business Review
Corporate Governance Report
Financial Statements
The Group is able to adjust the mix of interest rate offered
and term or notice period in a manner that allows it to raise
funding quickly. As part of this funding strategy, the Group
may only offer savings accounts for limited periods of time
and, from time to time, may not offer new products to
customers at all. The Group will cease offering products when
the Group’s need for funding at that time has been satisfied.
2017 performance
2017 saw the Group further grow its savings balances by
£331.4 million, 28.8%, through a period of strong demand
for its competitive notice and bond products available to
new customers and retention offers to existing customers
whose loyalty it intends to continue to reward with long term
competitive rates.
In October 2017, the Group successfully implemented a new
IT platform onto which all existing savings customers were
migrated. This new platform enables the Group to further
diversify its product range with the future development of
ISAs and limited access products, offer customers the ability
to self-service their accounts via online banking with the
associated cost and efficiency savings and enhance its risk
control framework against broader cyber and financial crime
risks. At the point of publishing, the Group has already raised
over £67 million on this new platform.
Looking forward
The Group expects competition for savings balances to
heighten through 2018 and into 2019 with the end of the
Bank of England’s Term Funding Scheme, with those
institutions that have relied on this source of funds as a
primary method of funding growth in recent years re-entering
the market for retail funding and increasing the cost of funds.
As such, the Group is continuing to invest in diversification
and development of its savings function.
With the successful delivery of the new savings IT platform,
the Group is now undertaking a period of gradual
development with new capability being rolled out in a
controlled manner. This has commenced with the launch
of new product options such as capitalised interest and
internet banking for new customers.
The next steps will be to further roll out the capability of
the new platform to respond to customer feedback and
demand. In particular, internet banking will be made
available to existing customers and the ability to self-serve
accounts introduced. This will include applying for new
accounts and providing maturity instructions online, and
contacting the Group’s UK based customer service team
by secure messaging.
The Group also intends to widen its product range, including
the launch of Cash ISAs and limited access accounts. These
products will lower the Group’s interest expense over time as
volumes grow.
Savings balances vs prior years
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www.securetrustbank.co.uk
41
Secure Trust Bank PLC Annual Report & Accounts 2017
Straightforward transparent banking
Principal risks and uncertainties
On an ongoing basis, the Directors carry
out a robust assessment of the principal
risks facing the group, including those
that would threaten its business model,
future performance, solvency or liquidity.
The following are considered to be the
principal risks facing the Group:
Credit Risk
The risk that a counterparty will be unable to pay
amounts in full when due.
Liquidity Risk
The risk that the Group will encounter difficulty in
meeting obligations associated with its financial
liabilities that are settled by delivering cash or another
financial asset.
Operational Risk
The risk of direct or indirect loss arising from a wide
variety of causes associated with the Group’s processes,
personnel, technology and infrastructure, and from
external factors other than the risks identified above.
Capital Risk
The risk that the Group will have insufficient capital
resources to support the business.
Market Risk
The risk that the value of, or revenue generated from,
the Group’s assets and liabilities is impacted as a result
of market movements, predominantly interest rates.
Conduct Risk
The potential for customers (and the business) to suffer
financial loss or other detriment through the actions
and decisions made by the business and its staff.
Regulatory Risk
The risk that the Group fails to be compliant with all
relevant regulatory requirements.
Notes 28 to 32 to the financial statements provide
further analysis of certain financial risks.
Further details of the principal risks, the changes in risk
profile during the 2017 financial year and the Group’s
risk management framework are given in the following
tables:
Improved
Stable
Deteriorating
42
Description
Credit Risk
Credit risk is the risk that a counterparty will be unable
to satisfy their debt servicing commitments when due.
Counterparties include the consumers to whom the Group
lends on an unsecured basis and the SMEs to whom the
Group lends on a secured basis as well as the market
counterparties with whom the Group deals.
Mitigation
Change – Improved
The Group manages credit risk through internal controls and
The Group’s employees based in Haydock’s premises assess
through a three lines of defence model. The first line is the business
this lending for compliance with policy.
operation team with the credit risk team being second line and
internal audit being the third line. The Board Risk Committee
oversees the Consumer Credit Risk Committee and SME Credit
Committee, which are the monitoring committees for credit risk.
The Board Risk Committee also approves lending authorities in
respect of SME lending.
Exposure to credit risk is also managed in part by obtaining
security. Motor Finance loans are secured against motor vehicles.
Mortgages are secured against land/property and Real Estate
Finance and Asset Finance loans are secured against property
and tangible assets respectively. Commercial Finance advances
are secured against a debtor book, inventory or property if a
Each consumer lending product has a credit risk committee
commercial mortgage is provided.
which reviews business performance from new application metrics
through to loss performance by business type and introducer.
Policy and scorecard changes are approved at this committee.
Management monitors the ratings of the counterparties in
relation to the Group’s loans and advances to banks. There is
no direct exposure to the Eurozone and peripheral Eurozone
The Group has pre-determined limits laid down by the Board Risk
countries.
Committee that reflect the Bank’s appetite for volume and quality
Forbearance
of business by sector and introducer.
For Real Estate Finance and Commercial Finance, lending
decisions are made on an individual transaction basis, using expert
judgement and assessment against criteria set out in the lending
policies. Asset Finance lending is outsourced to Haydock, who
operate in line with the Group’s credit policies and risk appetite.
The Group does not routinely reschedule contractual
arrangements where customers default on their repayments.
It may offer the customer the option to reduce or defer payments
for a short period, in which cases the loan will retain the normal
contractual payment due dates and will be treated the same as
any other defaulting cases for impairment purposes.
Consumer Finance Credit Risk
system capabilities and product set, in order to improve the
The Group ceased making unsecured personal loans to consumers
credit quality of the portfolio and drive business growth.
in January 2017, as a result of the competitive landscape and
concerns over general over-indebtedness in the market place.
The remaining portfolio was sold in December 2017, as set out
in Note 37.
The Group continues to grow its Retail Finance lending book
Secure Trust Bank entered the Consumer Mortgage market
in 2017. The Group offers basic fixed term mortgage and
re-mortgage products for those good quality customers with
non-straightforward circumstances that struggle to meet the
requirements of high street lenders. All loans are secured on
through interest free, interest bearing and Buy Now Pay Later
the applicant’s property. The Group is making a cautious entry
propositions. Pricing for each of these product types is set to
into the market, with lending balances of £16.5 million at
ensure that the expected return for each product is achieved.
31 December 2017.
Pricing meetings are held monthly to review performance against
pricing expectations for the top 30 introducers. Application trends,
arrears and loss trends are monitored monthly by the Credit Risk
Team. A new scorecard, built by industry risk modelling experts,
was implemented in December 2017 and is expected to ensure
further measured growth and improved loss performance in 2018.
The Group’s Motor Finance business has continued to grow in 2017.
The last two years have seen increased competition in the motor
finance arena with several companies competing in the same
segments of the market. This resulted in the Group receiving poorer
quality customers and higher than expected impairments last year.
The Group is expecting 2018 to be challenging for Motor Finance
consumers as the UK witnesses historic high levels of consumer
credit for individuals. Secure Trust Bank has taken the decision to
de-risk its business and has stopped lending in the three highest
risk tiers of business. The Group has implemented a new scorecard
which is providing the expected improvement in bad debt rates
and an improved distribution of customer quality across lower risk
tiers of business. Further improved performance is expected in
2018 as the business written on the higher risk tiers runs off
replaced with better quality higher scoring business.
The Group is strengthening the experience of the Motor
management team, including the appointment of a new Managing
Director and Finance Director. The business is developing its
Business Finance Credit Risk
Lending to this sector has continued to grow, with continued
application of robust risk governance, credit appetite and lending
policies, alongside the significant experience within the lending
teams. This has served the Group well to date as it continues to
assess the potential impacts of the UK’s decision to leave the
European Union, particularly in the Central London Real Estate
Market, where risk appetite remains substantially reduced and
lending has been pared back.
A programme to develop probability of default modelling for
each of the Business Finance portfolios commenced in 2015
and now following successful testing and calibration has been
adopted in full from December 2017.
Business Finance impairments and arrears have remained minimal
to date. Management continues to closely monitor the portfolios
and the external events and environment that could impact on
each of them.
Concentration Risk
Management assesses the potential concentration risk from
geographic, product and individual loan concentration. Due to
the well diversified nature of its lending operations, the Group
does not consider there to be a material exposure arising from
concentration risk.
Description
Credit Risk
Credit risk is the risk that a counterparty will be unable
to satisfy their debt servicing commitments when due.
Counterparties include the consumers to whom the Group
lends on an unsecured basis and the SMEs to whom the
Group lends on a secured basis as well as the market
counterparties with whom the Group deals.
Change – Improved
Strategic Report
Corporate Governance Report
Financial Statements
Mitigation
The Group manages credit risk through internal controls and
through a three lines of defence model. The first line is the business
operation team with the credit risk team being second line and
internal audit being the third line. The Board Risk Committee
oversees the Consumer Credit Risk Committee and SME Credit
Committee, which are the monitoring committees for credit risk.
The Board Risk Committee also approves lending authorities in
respect of SME lending.
Each consumer lending product has a credit risk committee
which reviews business performance from new application metrics
through to loss performance by business type and introducer.
Policy and scorecard changes are approved at this committee.
The Group has pre-determined limits laid down by the Board Risk
Committee that reflect the Bank’s appetite for volume and quality
of business by sector and introducer.
For Real Estate Finance and Commercial Finance, lending
decisions are made on an individual transaction basis, using expert
judgement and assessment against criteria set out in the lending
policies. Asset Finance lending is outsourced to Haydock, who
operate in line with the Group’s credit policies and risk appetite.
The Group’s employees based in Haydock’s premises assess
this lending for compliance with policy.
Exposure to credit risk is also managed in part by obtaining
security. Motor Finance loans are secured against motor vehicles.
Mortgages are secured against land/property and Real Estate
Finance and Asset Finance loans are secured against property
and tangible assets respectively. Commercial Finance advances
are secured against a debtor book, inventory or property if a
commercial mortgage is provided.
Management monitors the ratings of the counterparties in
relation to the Group’s loans and advances to banks. There is
no direct exposure to the Eurozone and peripheral Eurozone
countries.
Forbearance
The Group does not routinely reschedule contractual
arrangements where customers default on their repayments.
It may offer the customer the option to reduce or defer payments
for a short period, in which cases the loan will retain the normal
contractual payment due dates and will be treated the same as
any other defaulting cases for impairment purposes.
Consumer Finance Credit Risk
The Group ceased making unsecured personal loans to consumers
in January 2017, as a result of the competitive landscape and
concerns over general over-indebtedness in the market place.
The remaining portfolio was sold in December 2017, as set out
in Note 37.
The Group continues to grow its Retail Finance lending book
through interest free, interest bearing and Buy Now Pay Later
propositions. Pricing for each of these product types is set to
ensure that the expected return for each product is achieved.
Pricing meetings are held monthly to review performance against
pricing expectations for the top 30 introducers. Application trends,
arrears and loss trends are monitored monthly by the Credit Risk
Team. A new scorecard, built by industry risk modelling experts,
was implemented in December 2017 and is expected to ensure
further measured growth and improved loss performance in 2018.
The Group’s Motor Finance business has continued to grow in 2017.
The last two years have seen increased competition in the motor
finance arena with several companies competing in the same
segments of the market. This resulted in the Group receiving poorer
quality customers and higher than expected impairments last year.
The Group is expecting 2018 to be challenging for Motor Finance
consumers as the UK witnesses historic high levels of consumer
credit for individuals. Secure Trust Bank has taken the decision to
de-risk its business and has stopped lending in the three highest
risk tiers of business. The Group has implemented a new scorecard
which is providing the expected improvement in bad debt rates
and an improved distribution of customer quality across lower risk
tiers of business. Further improved performance is expected in
2018 as the business written on the higher risk tiers runs off
replaced with better quality higher scoring business.
The Group is strengthening the experience of the Motor
management team, including the appointment of a new Managing
Director and Finance Director. The business is developing its
system capabilities and product set, in order to improve the
credit quality of the portfolio and drive business growth.
Secure Trust Bank entered the Consumer Mortgage market
in 2017. The Group offers basic fixed term mortgage and
re-mortgage products for those good quality customers with
non-straightforward circumstances that struggle to meet the
requirements of high street lenders. All loans are secured on
the applicant’s property. The Group is making a cautious entry
into the market, with lending balances of £16.5 million at
31 December 2017.
Business Finance Credit Risk
Lending to this sector has continued to grow, with continued
application of robust risk governance, credit appetite and lending
policies, alongside the significant experience within the lending
teams. This has served the Group well to date as it continues to
assess the potential impacts of the UK’s decision to leave the
European Union, particularly in the Central London Real Estate
Market, where risk appetite remains substantially reduced and
lending has been pared back.
A programme to develop probability of default modelling for
each of the Business Finance portfolios commenced in 2015
and now following successful testing and calibration has been
adopted in full from December 2017.
Business Finance impairments and arrears have remained minimal
to date. Management continues to closely monitor the portfolios
and the external events and environment that could impact on
each of them.
Concentration Risk
Management assesses the potential concentration risk from
geographic, product and individual loan concentration. Due to
the well diversified nature of its lending operations, the Group
does not consider there to be a material exposure arising from
concentration risk.
www.securetrustbank.co.uk
43
Secure Trust Bank PLC Annual Report & Accounts 2017
Straightforward transparent banking
Principal risks and
uncertainties
continued
Description
Liquidity Risk
Mitigation
Governance of liquidity risk management
Risk tolerance
The Group’s Board has agreed a liquidity risk appetite to
ensure that adequate liquidity resources are held to meet
its Overall Liquidity Adequacy Rule (OLAR) and to meet
the minimum Liquidity Coverage Ratio (LCR).
The Group assesses and formally demonstrates the adequacy
of its liquidity through the Internal Liquidity Adequacy
Assessment Process (ILAAP). As part of the ILAAP, the Group
conducts regular and comprehensive liquidity stress testing
to ensure compliance with OLAR.
Structure and responsibilities for liquidity risk management
The Group has a formal governance structure in place to
manage and mitigate liquidity risk on a day to day basis.
The Board sets and approves the Group’s liquidity risk
management strategy. The ALCO, comprising senior
management and executives of the Group, meets monthly
to review liquidity risk against set thresholds and risk indicators
including early warning indicators, liquidity risk tolerance
levels and ILAAP metrics. These metrics are managed on
a day-to-day basis by the Group’s treasury function.
Internal liquidity reporting
Liquidity metrics are monitored daily through daily liquidity
reporting and monthly through ALCO. Metrics are also
included in the Monthly Information pack tabled at the
Group’s Executive Committee (Exco), Board Risk Committee
and the Board.
Communication of liquidity risk strategy, policies and
practices across business lines and with the Board
The Group’s ALCO is responsible for implementing and
controlling the liquidity risk appetite established by the Board.
ALCO monitors compliance with the Group’s policies and
oversees the overall strategy, guidelines and limits so that the
Group’s future plans and strategy can be achieved within risk
appetite.
Funding strategy
The Group’s funding risk appetite is to ensure that the Group
has access to stable funding markets and is not reliant on any
single source of funding. The Group is mainly funded by
capital and customer deposits. The Group also has limited
borrowings under Bank of England funding schemes but does
not have other direct exposures to wholesale markets.
Funding strategy is managed centrally.
The liquidity requirements of the Group are mainly met by
maintaining funds in its Bank of England reserve account to cover
any short-term net outflow requirements. Longer term funding is
also in place for structural liquidity and funding requirements.
The Group is required to meet daily cash flow requirements
arising from maturing deposits and loan draw-downs, and
maintains significant cash resources to meet all of these needs
as they fall due.
The Risk Function is responsible for ensuring that appropriate risk
management processes and controls are in place, and that they
are sufficiently robust, so as to ensure that key risks are identified,
assessed, monitored and mitigated.
The primary measure used by management to assess the
adequacy of liquidity is the Overall Liquidity Adequacy Rule
(OLAR), which is the Board’s own view of the Group’s liquidity
needs as set out in the Board approved ILAAP.
The Group’s approach to managing liquidity is to ensure, as far
as possible, that it will always have sufficient liquidity to meet its
liabilities when due, under both normal and stressed conditions,
and can fund its assets at reasonable cost and without incurring
unacceptable losses or risking damage to the Group’s reputation
through a failure to meet its obligations.
The Group maintains at all times liquidity resources which are
adequate, both as to amount and quality, to ensure that there is
no significant risk that its liabilities cannot be met as they fall due.
The Group maintains a buffer of unencumbered High Quality
Liquid Assets (HQLA) that is available to meet its liquidity
requirements.
Improved
Stable
Deteriorating
44
Strategic Report
Corporate Governance Report
Financial Statements
Description
Liquidity Risk continued
Mitigation
Liquidity risk mitigation techniques
The Group seeks to mitigate liquidity risk through a number
of strategies and processes:
• The diversification of its deposit and loan products;
• Offering depositors competitive interest rates to reduce
churn and volatility;
• Contractual repayment term matching of a monitored
proportion of its loan and deposit book;
• Acquiring funding through lower value, higher volume
deposits;
• Monthly ALCO meetings reviewing early warning indicators
and tolerances of all relevant balance sheet items;
• Access to Bank of England liquidity schemes;
• Holding adequate levels of High Quality Liquid Assets with
a high proportion of cash in the Group’s Bank of England
reserve account.
Stress testing
The key risk drivers identified in the Group’s Individual Liquidity
Adequacy Process as being applicable to the Group are:
• Retail Funding: the responsiveness of customer deposits to
changes in a bank’s credit worthiness;
• Intraday Liquidity Risk: changes in liquidity intraday, for which
additional liquidity is held;
• Pipeline Risk: exposure to undrawn loan commitments.
The Group uses various short and medium term forecasts to
monitor future liquidity requirements and these include stress
testing assumptions to identify the required levels of liquidity.
Stress testing is typically performed on a daily basis and levels
of liquidity under stress are forecast regularly and monitored
by ALCO.
Contingency funding plans
If for reasons which may be beyond the business’ control, the
Group were to encounter a significant and sustained outflow of
deposits or other stress on the Group’s liquidity resource, a
Liquidity Contingency Plan (LCP) is maintained to ensure the
Group is able to maintain sufficient liquidity to remain a viable
independent financial institution following a severe liquidity
stress event.
Change – STABLE
The Group’s liquidity risk appetite is to ensure that adequate
liquidity resources are held to withstand all known reasonable
combinations of idiosyncratic and market risks for up to 60 days.
The aim is not to measure liquidity with a single metric but rather
a range of principles and metrics which, when taken together,
helps ensure that the Company’s liquidity risk is maintained at
an acceptable level.
An integral component of the approach to liquidity risk
management is stress testing, some of which is prescriptive using
very detailed rules and guidance issued within prudential
regulations and reported within regulatory returns.
In addition to the regulatory prescribed stress testing, the Group
undertakes its own stress tests. The Board approves limits against
both regulatory and internal stress testing requirements.
The Liquidity Contingency Plan (LCP) forms part of the Group’s
risk management framework, linking the Group’s Internal
Liquidity Adequacy Assessment Process (ILAAP) to the Recovery
Plan and Resolution Plan on a consistent basis.
The integration of the LCP to the Recovery Plan, Resolution Plan,
ILAAP and ICAAP is achieved through the use of consistent early
warning indicators and invocation trigger points that are regularly
monitored and reported against.
The Group has continued to attract new fixed and variable rate
deposits to broadly match the term lending by the Group.
Continuity of funding was not impacted by the transition to the
new deposits platform, which is now in place and will broaden
the funding options available.
The Group held liquidity which allowed it to exceed its OLAR
and LCR requirements throughout the year. The Funding to
Loans ratio at 31 December 2017 was 115.5% (2016: 110.4%).
www.securetrustbank.co.uk
45
Secure Trust Bank PLC Annual Report & Accounts 2017
Straightforward transparent banking
Principal risks and
uncertainties
continued
Description
Operational Risk
Operational Risk is the risk that the Group may be exposed to
direct or indirect loss arising from inadequate or failed internal
processes, personnel, technology/ infrastructure, or from
external factors.
The scope of Operational Risk is broad and includes Business
Process, Business Continuity, Third Party, Financial Crime,
Change, Human Resources, Information Security and IT Risk,
including Cyber Risk.
Change – IMPROVED
The improvement of
the status of this risk is
driven by the Group’s
continued investment
in resources, expertise
and systems.
Improved
Stable
Deteriorating
46
Capital Risk
Capital risk is the risk that the Group will have insufficient
capital resources to meet minimum regulatory requirements
and to support the business. The Group adopts a
conservative approach to managing its capital and at least
annually assesses the robustness of the capital requirements
as part of the Group’s Internal Capital Adequacy Assessment
Process (‘ICAAP’).
Change – STABLE
Mitigation
The Group has adopted an Operational Risk Policy and
The Group has a defined set of qualitative and quantitative
Framework designed in accordance with the ‘Principles for the
operational risk appetite measures. Quantitative measures
Sound Management of Operational Risk’ issued by the Basel
cover operational losses, complaints, key operational risks,
systems availability and information security. The appetite
measures are reported and monitored on a monthly basis.
Committee on Banking Supervision.
The approach ensures appropriate governance is in place to
provide adequate and effective oversight of the Group’s
operational risk. The governance framework includes the Board
Risk Committee and Group Operational Risk Committee.
The improvement of the status of this risk is driven by the
Group’s continued investment in resource, expertise and
systems to support the Operational Risk Framework and Policy.
This Framework defines and facilitates the following activities:
Key Risk themes of Operational Risk focus in 2017 include:
• Supplier management – The Group uses a number of
third parties to support its IT and operational processes.
The Group recognises that it is important to effectively manage
• A biannual Risk and Control Self Assessments process to identify,
these suppliers and has throughout 2017 introduced a suite of
assess and mitigate risks across all business units through
standard controls for all its material suppliers to reduce the risk
improvements to the control environment.
of operational impacts on these critical services.
• The Governance arrangements for managing and reporting
• IT resilience – Having adequate and effective servers, networks
these risks.
metrics.
• All risk appetite measures and associated thresholds and
• An incident management process that defines how incidents
should be managed and associated remediation, reporting
and root-cause analysis.
and storage systems. The Group tested its disaster recovery
and business continuity processes in 2017 and further
improved the processes of identifying, assessing and
managing its critical IT assets and processes.
• Information security and cyber risk – The Group has
maintained focus on ensuring the effective management of
risks arising from a failure or breach of its information
technology systems that could result in customer exposure,
business disruption, financial losses, or reputational damage.
Cyber risk continues to evolve and is covered in more detail in
the ‘Strategic and emerging risks’ section on page 50.
The Group’s capital management policy is focused on optimising
Not all material risks can be mitigated by capital, but where
shareholder value, in a safe and sustainable manner. The Board
capital is appropriate the Board has adopted an approach to
regularly reviews the current and forecast capital position to
determine the level of capital the Group needs to hold.
ensure capital resources are sufficient to support planned levels
This method takes the Pillar 1 capital formula calculations
of growth.
In accordance with the EU’s Capital Requirements Directive IV
(’CRD IV’) and the required parameters set out in the EU’s Capital
Requirement Regulation, the Group maintains an ICAAP which is
updated at least annually. The ICAAP is a process that brings
together the management framework (i.e. the policies,
procedures, strategies and systems that the Group has
(standardised approach for credit, market and operational risk)
as a starting point, and then considers whether each of the
calculations delivers a sufficient capital sum adequately to cover
management’s assessment of anticipated risks. Where it is
considered that the Pillar 1 calculations do not reflect the risk,
an additional capital add-on in Pillar 2 is applied, as per the
Individual Capital Guidance issued by the PRA.
implemented to identify, manage and mitigate its risks) and the
A complete assessment of the Group’s capital requirement is
financial disciplines of business planning and capital management.
contained in its Pillar 3 disclosures. Pillar 3 disclosures for the
Group for the year ended 31 December 2017 are published as
a separate document on the Group’s website.
Stringent stress tests are performed to ensure that capital
resources are adequate over a future three year horizon.
The basis of consolidation has been updated from a solo-
consolidated basis to a group consolidated basis following the
At 31 December 2017, the CET1 Ratio was 16.5% (2016: 18.0%)
Arbuthnot Banking Group shareholding in Secure Trust Bank
and the Leverage Ratio was 12.3% (2016: 14.5%) on a group
Group reducing to 18% in June 2016. As a result, all subsidiaries
consolidated basis.
Both ratios are significantly better than regulatory requirements.
The Group capital resources increased during the year to
£243.3 million as at 31 December 2017 (31 December 2016:
of Secure Trust Bank PLC are now included in the Group’s capital
resources and requirements, whereas previously the V12 and
DMS legal entities were excluded. The 2016 comparative ratios
above have been updated accordingly.
£232.7 million) on a group consolidated basis.
The Group has elected to adopt transitional provisions in respect
of the implementation of IFRS 9, as set out by the European
Banking Authority. These provisions allow the capital impact
of the standard to be phased in over a five year period.
Further details are provided in Note 29.
Description
Operational Risk
Operational Risk is the risk that the Group may be exposed to
direct or indirect loss arising from inadequate or failed internal
processes, personnel, technology/ infrastructure, or from
external factors.
The scope of Operational Risk is broad and includes Business
Process, Business Continuity, Third Party, Financial Crime,
Change, Human Resources, Information Security and IT Risk,
including Cyber Risk.
Change – IMPROVED
Capital Risk
Capital risk is the risk that the Group will have insufficient
capital resources to meet minimum regulatory requirements
and to support the business. The Group adopts a
conservative approach to managing its capital and at least
annually assesses the robustness of the capital requirements
as part of the Group’s Internal Capital Adequacy Assessment
Process (‘ICAAP’).
Change – STABLE
Strategic Report
Corporate Governance Report
Financial Statements
Mitigation
The Group has adopted an Operational Risk Policy and
Framework designed in accordance with the ‘Principles for the
Sound Management of Operational Risk’ issued by the Basel
Committee on Banking Supervision.
The approach ensures appropriate governance is in place to
provide adequate and effective oversight of the Group’s
operational risk. The governance framework includes the Board
Risk Committee and Group Operational Risk Committee.
The improvement of the status of this risk is driven by the
Group’s continued investment in resource, expertise and
systems to support the Operational Risk Framework and Policy.
This Framework defines and facilitates the following activities:
• A biannual Risk and Control Self Assessments process to identify,
assess and mitigate risks across all business units through
improvements to the control environment.
• The Governance arrangements for managing and reporting
these risks.
• All risk appetite measures and associated thresholds and
metrics.
• An incident management process that defines how incidents
should be managed and associated remediation, reporting
and root-cause analysis.
The Group’s capital management policy is focused on optimising
shareholder value, in a safe and sustainable manner. The Board
regularly reviews the current and forecast capital position to
ensure capital resources are sufficient to support planned levels
of growth.
In accordance with the EU’s Capital Requirements Directive IV
(’CRD IV’) and the required parameters set out in the EU’s Capital
Requirement Regulation, the Group maintains an ICAAP which is
updated at least annually. The ICAAP is a process that brings
together the management framework (i.e. the policies,
procedures, strategies and systems that the Group has
implemented to identify, manage and mitigate its risks) and the
financial disciplines of business planning and capital management.
Stringent stress tests are performed to ensure that capital
resources are adequate over a future three year horizon.
At 31 December 2017, the CET1 Ratio was 16.5% (2016: 18.0%)
and the Leverage Ratio was 12.3% (2016: 14.5%) on a group
consolidated basis.
Both ratios are significantly better than regulatory requirements.
The Group capital resources increased during the year to
£243.3 million as at 31 December 2017 (31 December 2016:
£232.7 million) on a group consolidated basis.
The Group has a defined set of qualitative and quantitative
operational risk appetite measures. Quantitative measures
cover operational losses, complaints, key operational risks,
systems availability and information security. The appetite
measures are reported and monitored on a monthly basis.
Key Risk themes of Operational Risk focus in 2017 include:
• Supplier management – The Group uses a number of
third parties to support its IT and operational processes.
The Group recognises that it is important to effectively manage
these suppliers and has throughout 2017 introduced a suite of
standard controls for all its material suppliers to reduce the risk
of operational impacts on these critical services.
• IT resilience – Having adequate and effective servers, networks
and storage systems. The Group tested its disaster recovery
and business continuity processes in 2017 and further
improved the processes of identifying, assessing and
managing its critical IT assets and processes.
• Information security and cyber risk – The Group has
maintained focus on ensuring the effective management of
risks arising from a failure or breach of its information
technology systems that could result in customer exposure,
business disruption, financial losses, or reputational damage.
Cyber risk continues to evolve and is covered in more detail in
the ‘Strategic and emerging risks’ section on page 50.
Not all material risks can be mitigated by capital, but where
capital is appropriate the Board has adopted an approach to
determine the level of capital the Group needs to hold.
This method takes the Pillar 1 capital formula calculations
(standardised approach for credit, market and operational risk)
as a starting point, and then considers whether each of the
calculations delivers a sufficient capital sum adequately to cover
management’s assessment of anticipated risks. Where it is
considered that the Pillar 1 calculations do not reflect the risk,
an additional capital add-on in Pillar 2 is applied, as per the
Individual Capital Guidance issued by the PRA.
A complete assessment of the Group’s capital requirement is
contained in its Pillar 3 disclosures. Pillar 3 disclosures for the
Group for the year ended 31 December 2017 are published as
a separate document on the Group’s website.
The basis of consolidation has been updated from a solo-
consolidated basis to a group consolidated basis following the
Arbuthnot Banking Group shareholding in Secure Trust Bank
Group reducing to 18% in June 2016. As a result, all subsidiaries
of Secure Trust Bank PLC are now included in the Group’s capital
resources and requirements, whereas previously the V12 and
DMS legal entities were excluded. The 2016 comparative ratios
above have been updated accordingly.
The Group has elected to adopt transitional provisions in respect
of the implementation of IFRS 9, as set out by the European
Banking Authority. These provisions allow the capital impact
of the standard to be phased in over a five year period.
Further details are provided in Note 29.
www.securetrustbank.co.uk
47
Secure Trust Bank PLC Annual Report & Accounts 2017
Straightforward transparent banking
Principal risks and
uncertainties
continued
Improved
Stable
Deteriorating
48
Description
Market risk
For the Group, market risk is primarily limited to interest rate
risk, being the potential adverse impact on the Group’s future
cash flows from changes in interest rates arising from the
differing interest rate risk characteristics of the Group’s assets
and liabilities. When interest rates change, the present value
and timing of future cash flows change. This in turn changes
the underlying value of the Group’s assets, liabilities and
off-balance sheet instruments and hence its economic value.
Changes in interest rates also affect the Group’s earnings by
altering interest-sensitive income and expenses, affecting its
net interest income.
The principal currency in which the Group operates is
Sterling, although a small number of transactions are
completed in US dollars, Euros and other currencies in the
Commercial Finance business. All currency exposures are
swapped to Sterling. The Group has no significant exposures
to foreign currencies and therefore there is no significant
currency risk.
Change – STABLE
Conduct risk
The Group defines conduct risk as the risk that the Group’s
products and services, and the way they are delivered, result
in poor outcomes for customers, or harm to the Group.
This could be as a direct result of poor or inappropriate
execution of the Group’s business activities or staff behaviour.
Change – STABLE
Regulatory Risk
Regulatory risk is the risk that the Group fails to be compliant
with all relevant regulatory requirements. This could occur if
the Group failed to interpret, implement and embed
processes and systems to address regulatory requirements,
emerging risks, key focus areas and initiatives or deal properly
with new laws and regulations.
Change – STABLE
Mitigation
The Group’s risk management framework, policies and procedures
The key measure the Group uses to monitor the risk is an Interest
are regularly reviewed and updated to ensure that they accurately
Rate Sensitivity Gap analysis which informs the Group of
identify the risks that the Group faces in its business activities and
mismatched interest rate risk positions.
are appropriate for the nature, scale and complexity of the Group’s
business.
The Group monitors the interest rate mismatch on a monthly
basis. The main test employed is a 200bps interest rate shock
Market risk is managed by the Company’s Treasury function and
across all interest indices on a parallel basis. The Group maintains
is overseen by the Assets and Liabilities Committee (‘ALCO’).
such exposures within the risk appetite set by the Board.
The Group does not take significant unmatched positions and
does not operate a trading book.
The mismatch in terms of interest rate repricing characteristics of
The Group measures Earnings at Risk (EaR) and Value at Risk
the Bank’s assets and liabilities creates exposure to interest rate
(VaR), predominantly by monitoring the Interest Rate Sensitivity
risk that requires management and measurement within risk limits.
Gap. Interest rate risks inherent in new products or through
An effective risk management process that maintains interest rate
risk within prudent levels is therefore essential to the safety and
soundness of the Bank.
changes to the terms and conditions of existing products were
assessed over the course of the year. The Group remained within
risk appetite in respect of interest rate risk throughout the year.
The Group takes a principles based approach and includes
Conduct risk management information is also reviewed at
retail and commercial customers in its definition of ‘customer’,
Executive Committee meetings at product level.
which covers all business units and both regulated and
unregulated activities.
Across the Group, conduct risk exposure is managed via
The key risk indicators vary across the business units to reflect the
relevant conduct risks; the business units’ key risk indicators are
aggregated for measurement against the Group’s risk appetite,
monthly review and challenge of key risk indicators (‘KRIs’) at
which is reported to the Group Executive Committee and the
the Customer Focus Committee, which oversees complaints,
Board.
FEEFO and Customer Service Excellence as well as conduct risk.
Review of conduct risk and controls with the business units
Training on conduct risk continues to be delivered to new
is managed through the regular cycle of risk and control
starters, with an eLearning module completed by all staff during
self-assessments, in line with other operational risk categories.
the year.
Monthly review and challenge of key risk indicators in the
Customer Focus Committee provides oversight of the first line
activities to assure senior management that the first line are
identifying conduct risks when they arise and taking appropriate
actions to mitigate them.
The Group seeks to manage regulatory risks through the Group
wide risk management framework. The Group Compliance and
Regulatory Risk Committee is responsible for reviewing and
monitoring regulatory changes, and ensuring that appropriate
actions are taken, and also reviewing and approving the
compliance risk management framework. Further details are
given on page 68.
In the year ended 31 December 2017, the Group has delivered
A number of formal projects and initiatives are in place to
changes to address new and revised regulations and legislation
address forthcoming regulatory changes in 2018 including
that have come into force, including changes to Regulatory
References requirements, conduct rules for Non-Executive
extending the Senior Managers and Certification Regime;
Insurance Distribution Directive; General Data Protection
Directors, change to the FSCS Depositor Protection Limits and
Regulation; and PRA/FCA ring fencing.
completion of the amendments necessary for the revised Payment
Services Directive 2.
Description
Market risk
For the Group, market risk is primarily limited to interest rate
risk, being the potential adverse impact on the Group’s future
cash flows from changes in interest rates arising from the
differing interest rate risk characteristics of the Group’s assets
and liabilities. When interest rates change, the present value
and timing of future cash flows change. This in turn changes
the underlying value of the Group’s assets, liabilities and
off-balance sheet instruments and hence its economic value.
Changes in interest rates also affect the Group’s earnings by
altering interest-sensitive income and expenses, affecting its
net interest income.
The principal currency in which the Group operates is
Sterling, although a small number of transactions are
completed in US dollars, Euros and other currencies in the
Commercial Finance business. All currency exposures are
swapped to Sterling. The Group has no significant exposures
to foreign currencies and therefore there is no significant
currency risk.
Change – STABLE
Conduct risk
The Group defines conduct risk as the risk that the Group’s
products and services, and the way they are delivered, result
in poor outcomes for customers, or harm to the Group.
This could be as a direct result of poor or inappropriate
execution of the Group’s business activities or staff behaviour.
Change – STABLE
Regulatory Risk
Regulatory risk is the risk that the Group fails to be compliant
with all relevant regulatory requirements. This could occur if
the Group failed to interpret, implement and embed
processes and systems to address regulatory requirements,
emerging risks, key focus areas and initiatives or deal properly
with new laws and regulations.
Change – STABLE
Strategic Report
Corporate Governance Report
Financial Statements
Mitigation
The Group’s risk management framework, policies and procedures
are regularly reviewed and updated to ensure that they accurately
identify the risks that the Group faces in its business activities and
are appropriate for the nature, scale and complexity of the Group’s
business.
Market risk is managed by the Company’s Treasury function and
is overseen by the Assets and Liabilities Committee (‘ALCO’).
The Group does not take significant unmatched positions and
does not operate a trading book.
The key measure the Group uses to monitor the risk is an Interest
Rate Sensitivity Gap analysis which informs the Group of
mismatched interest rate risk positions.
The Group monitors the interest rate mismatch on a monthly
basis. The main test employed is a 200bps interest rate shock
across all interest indices on a parallel basis. The Group maintains
such exposures within the risk appetite set by the Board.
The mismatch in terms of interest rate repricing characteristics of
the Bank’s assets and liabilities creates exposure to interest rate
risk that requires management and measurement within risk limits.
An effective risk management process that maintains interest rate
risk within prudent levels is therefore essential to the safety and
soundness of the Bank.
The Group measures Earnings at Risk (EaR) and Value at Risk
(VaR), predominantly by monitoring the Interest Rate Sensitivity
Gap. Interest rate risks inherent in new products or through
changes to the terms and conditions of existing products were
assessed over the course of the year. The Group remained within
risk appetite in respect of interest rate risk throughout the year.
The Group takes a principles based approach and includes
retail and commercial customers in its definition of ‘customer’,
which covers all business units and both regulated and
unregulated activities.
Across the Group, conduct risk exposure is managed via
monthly review and challenge of key risk indicators (‘KRIs’) at
the Customer Focus Committee, which oversees complaints,
FEEFO and Customer Service Excellence as well as conduct risk.
Conduct risk management information is also reviewed at
Executive Committee meetings at product level.
The key risk indicators vary across the business units to reflect the
relevant conduct risks; the business units’ key risk indicators are
aggregated for measurement against the Group’s risk appetite,
which is reported to the Group Executive Committee and the
Board.
Review of conduct risk and controls with the business units
is managed through the regular cycle of risk and control
self-assessments, in line with other operational risk categories.
Training on conduct risk continues to be delivered to new
starters, with an eLearning module completed by all staff during
the year.
Monthly review and challenge of key risk indicators in the
Customer Focus Committee provides oversight of the first line
activities to assure senior management that the first line are
identifying conduct risks when they arise and taking appropriate
actions to mitigate them.
The Group seeks to manage regulatory risks through the Group
wide risk management framework. The Group Compliance and
Regulatory Risk Committee is responsible for reviewing and
monitoring regulatory changes, and ensuring that appropriate
actions are taken, and also reviewing and approving the
compliance risk management framework. Further details are
given on page 68.
In the year ended 31 December 2017, the Group has delivered
changes to address new and revised regulations and legislation
that have come into force, including changes to Regulatory
References requirements, conduct rules for Non-Executive
Directors, change to the FSCS Depositor Protection Limits and
completion of the amendments necessary for the revised Payment
Services Directive 2.
A number of formal projects and initiatives are in place to
address forthcoming regulatory changes in 2018 including
extending the Senior Managers and Certification Regime;
Insurance Distribution Directive; General Data Protection
Regulation; and PRA/FCA ring fencing.
www.securetrustbank.co.uk
49
Secure Trust Bank PLC Annual Report & Accounts 2017
Straightforward transparent banking
House prices have continued to rise in 2017; however
confidence in the housing market is now reducing largely
due to the uncertainty described above and concerns from
new buyers over job security and the ability to raise deposits.
The UK housing stock remains in short supply. The Group will
continue to monitor the mortgage market in connection with
its Consumer Mortgage product.
Regulatory and Capital position
The Group continues to monitor regulatory developments
in respect of capital requirements for banks. There has been
acknowledgement that the current approach, whereby
standardised risk weights under Pillar 1 are assessed
separately to and then combined with Pillar 2 add ons, can
lead to excessive capital requirements. The impact of a more
judgemental approach should become clearer in 2018.
The Bank of England has announced an increase in the
UK countercyclical buffer, from zero to 0.5% of risk weighted
assets from June 2018 with a further increase to 1% following
in November 2018. The capital conservation buffer also
increases over the Group’s forecast period. These increases
in buffers are factored into the Group’s capital planning.
Information Security and Cyber Risk
The Group has continued to maintain focus on managing
risks arising from a failure or breach of its information
technology systems or via our supply chain.
The Group recognises that financial services organisations
face an increasing number and variety of cyber-attacks that
could result in customer exposure, business disruption,
financial losses, legal penalties or reputational damage.
Continuously improving resilience against emerging
cyber threats requires an understanding of the tactics
and motivations of potential attackers. The Group adopts
strategies and comprehensive technical and organisational
measures to keep abreast of these tactics and to prevent,
detect, disrupt and facilitate rapid recovery from attacks.
Principal risks and
uncertainties
continued
Strategic and emerging risks
In addition to the principal risks described on the previous
page, the Board considers strategic and emerging risks,
including key factors, trends and uncertainties which can
influence the results of the Group. These risks include
the following:
Macroeconomic environment and market conditions
The Group operates exclusively within the UK and its
performance is influenced by the macroeconomic
environment in the UK. The economy affects demand
for the Group’s products, margins that can be earned on
lending assets and the levels of loan impairment.
Growth in the UK economy slowed in 2017, largely due to
economic uncertainty. This uncertainty is affecting business
investment, export growth and causing a moderation in
UK household spending. However, current UK economic
fundamentals remain strong and employment levels are
at a record level. The longer term effects of the vote will
become clearer once the nature of the UK’s exit from the
European Union has been clarified.
The availability of liquidity from the BOE’s Funding for
Lending and Term Funding Schemes have also impacted
on lending markets, driving aggressive pricing from
some lenders who have used this funding to build scale.
The closure of these schemes in February 2018 will push
up funding costs. The Group has not excessively used these
schemes, and expects market pricing to return over time
to levels where the Group has been operating, therefore
strengthening the Group’s competitive position.
The Financial Policy Committee, PRA and FCA have all
expressed concerns over 2017, regarding the UK consumer
credit market. The Group shares these concerns, perceiving
there to be a mispricing of risk, and has reacted accordingly
by exiting markets most affected. As a consequence,
the Group is not exposed to the majority of the issues
highlighted by the regulators.
The repositioning of the Group’s lending books, towards
lower risk areas, leaves it well placed to navigate this period
of uncertainty. The Group will continue to review its credit risk
appetite as economic and market conditions evolve.
On 1 November 2017, the Monetary Policy Committee
announced a base rate rise, for the first time in a decade,
to 0.5%, in order to head off rising inflation. The overshoot
of the inflation target reflects the effects on import prices of
the referendum-related fall in sterling. Rising interest rates
may expose borrowers to difficulties making interest
payments, however the continuing low base rate position has
a mitigating effect on credit risk. The Group is less exposed
to the credit risk related impact of interest rate changes than
the systemically important banks and building societies,
through its fixed rates on both its assets and liabilities.
50
Strategic Report
Corporate Governance Report
Financial Statements
Model Risk and the impact of IFRS 9
The Group has significantly enhanced its modelling capability
in response to the introduction of IFRS 9. From 1 January 2018
onwards, the Group’s impairment provisions will be estimated
using a suite of models that use historical and forward
looking data, with associated judgements and assumptions,
to derive the probability of default (PD), loss given default
(LGD) and exposure at default (EAD). In addition, the models
used to derive the effective interest rate of the Group’s
lending portfolios, and hence drive the release of income,
are being upgraded.
Material elements of the Group’s financial statements
will therefore increasingly be impacted by these models.
The Group has taken steps to mitigate the associated model
risk: the risk that a financial model fails to perform effectively
and produces an inaccurate result. A Model Governance
Committee has been established, comprising members
from the Finance and Risk teams, to ensure the Group’s
models are being developed and maintained subject to
adequate controls, including validation of model outputs.
This committee has approved the usage of the Group’s
IFRS 9 models.
The introduction of IFRS 9 also brings an element of
uncertainty into banks’ reporting. This is a complex
accounting standard which has required all banks to develop
new models. This increases the risk that firms will account for
impairments using a wide variety of assumptions and model
methodologies, with consequent inconsistency in the
reported results that could take a number of years to align.
Significant disclosure is required in order to assist the
understanding of IFRS 9 results, and the Group is well
progressed in developing this disclosure for use in its
2018 interim report.
www.securetrustbank.co.uk
51
Secure Trust Bank PLC Annual Report & Accounts 2017
Straightforward transparent banking
Going concern and viability
In assessing the Group as a going concern,
the directors have given consideration to the
factors likely to affect its future performance
and development, the Group’s financial
position and the principal risks and
uncertainties facing the Group, as set
out in the Strategic Report.
52
Going concern
The Group uses various short and medium term forecasts to
monitor future capital and liquidity requirements and these
include stress testing assumptions to identify the headroom
on regulatory compliance measures.
The directors are satisfied that the Company and the Group
have adequate resources to continue to operate for the
foreseeable future as going concerns. For this reason they
continue to adopt the going concern basis in preparing
these financial statements.
Business viability
In accordance with provision C2.2 of the UK Corporate
Governance Code, the directors confirm that there is a
reasonable expectation that the Company and the Group
will be able to continue in operation and meet their liabilities
as they fall due, for the period up to 31 December 2020.
The assessment of ongoing viability covers this period as it
is the Group’s planning horizon and the period covered by
the Group’s stress testing.
Given the Group’s strong capital and liquidity position at
31 December 2017, reduction in exposure to higher risk
lending, continuing growth in profit and positive trading
outlook, the directors are confident of the Group’s viability
over the longer term. However, the inherent uncertainties
regarding the economic, regulatory and market environment
that the Group operates in may compromise the reliability
of longer range forecasts.
The directors have based the assessment on:
• The latest annual budget, which contains information on
the expected financial position and performance for the
period to 31 December 2020 and by considering the
potential impact of the principal risks facing the Group,
as set out on pages 42 to 51.
• The analysis of key sensitivities, undertaken as part of the
budget process, which could impact on profitability for the
forthcoming financial year. Assumptions made to calculate
risk weighted assets and capital requirements are clearly
stated and additional scenarios are modelled to
demonstrate the potential impact of risks and
uncertainties on capital.
• The Group’s ILAAP, which uses stress scenarios to assess
the adequacy of liquidity resources.
• The Group’s ICAAP, which considers a macroeconomic
stress and a severe shock scenario in order to assess the
adequacy of capital resources.
• Consideration of the other principal risks as set out on
pages 42 to 51, to identify any other severe but plausible
scenarios that could threaten the Group’s business model,
future performance, solvency or liquidity.
In making this statement, the Board has sought input from
the Audit Committee and the Risk Committee.
Strategic Report
Corporate Governance Report
Financial Statements
Greenhouse Gas emissions from our operations
As a financial services provider, the Group’s operations do
not have a significant impact on the environment. The Group
reports on its greenhouse gas emissions and, to ensure its
environmental impact remains low, has included it as a key
performance indicator. The key performance indicators are
shown on page 19.
The Group’s report on all of the emission sources required
under the Companies Act 2006 (Strategic Report and
Directors’ Report) Regulation 2013 is set out below. This is
the second Greenhouse Gas report that the Group has issued
under the above Regulation and only emission sources where
accurate and consistent data is available for the complete
reporting period have been included.
Scope 1 emissions resulting from the combustion of natural
gas for heating buildings and Scope 2 and 3 emissions
associated with the consumption of purchased electricity are
included within the GHG report. Scope 1 emissions resulting
from the use of company owned/leased vehicles have been
excluded. All Scope 3 sources, except for purchased
electricity transmission, distribution emissions and grey fleet
have also been excluded from this report. Systematic
procedures have also been established to collect accurate
data for Scope 1 company vehicle and fugitive refrigerant
emissions with effect from 1 January 2017. The Group has set
2017 as the GHG baseline year and reports from 2018 will
show emissions for the current year and for each subsequent
year following the baseline year.
In compiling this GHG report, the GHG Protocol Corporate
Accounting and Reporting Standard (revised edition) and
energy supplier invoice data have been used. Greenhouse
gas emissions are reported as a single total, by converting
them to the equivalent amount of CO2 using emission factors
from the UK Government’s GHG Conversion Factors for
Company Reporting 2017.
Corporate responsibility
The Group has a clearly defined commitment
within the corporate strategy ‘To make this a
great Bank for customers and colleagues’.
The Group strategy is underpinned by six core values that
reflect the behaviours required to deliver the Group’s promise
to deliver straightforward and transparent banking. Exceeding
customer expectations and living the Group’s values are at the
heart of the Group culture and as such it rewards innovative
and inspiring behaviours and sets clear expectations around
staff being trustworthy, compliant and safe. The Group also
always seeks to act as a responsible business. Further details
on how the Group meets its commitments are set out below.
Responsible Business
The Group takes its commitment to operate as a responsible
business very seriously and recognises that this goes far
beyond the adherence to legal requirements and best
practice. Measures are in place to assess the impact of the
Group’s business model and the delivery of its services on its
customers, and the organisation strives to make a positive
contribution to the wider community in which it operates.
The Board does not consider there to be any environmental
social or governance matters that are significant to the
business of the Group.
The Group sees its ability to have a positive effect on social
and community issues as an extension of its customer centric
culture and colleagues are encouraged to make a positive
contribution through a number of community focused
schemes. Last year the Group supported 32 charities through
activities run by its Charity Committees. The Charity
Committees empower colleagues from different business
areas to drive forward a wide range of successful charitable
activities. This year the Group also doubled the available
funding for its pound for pound matching scheme which
allows colleagues to increase the money they raise for charity.
The enthusiasm of colleagues to help good causes resulted
in a wide range of fundraising activities which generated over
£50,000 for charities in 2017.
Following the launch of a community volunteering scheme in
2016 which allows employees to take one day paid leave to
make a difference to charities or community groups in their
area, nearly a thousand hours were donated to worthy causes
during 2017. Group staff have taken part in a wide range of
activities and made a positive contribution to many charities
and community projects.
www.securetrustbank.co.uk
53
Secure Trust Bank PLC Annual Report & Accounts 2017
Straightforward transparent banking
Corporate responsibility
continued
The Group’s Greenhouse Gas emissions are shown at the
base of the page.
Human rights and tackling modern slavery
The Group is subject to the European Convention on Human
Rights and the UK Human Rights Act 1998. The fair treatment
of customers is central to the Group’s strategy and values,
and the Group opposes all forms of discrimination.
The Group is committed to tackling modern slavery and
human trafficking and has taken steps to ensure it is
considered and addressed in its business and throughout its
supply chain, consistent with its obligations under the Modern
Slavery Act 2015. The full Board statement on Slavery and
Human Trafficking can be found on the Group’s website:
www.securetrustbank.co.uk
Employees
Investors in People
Secure Trust Bank Group currently holds the highly coveted
Investors in People Gold Accreditation, which the Group
is extremely proud of. This internationally recognised
accreditation is held by over 10,000 organisations worldwide
and defines what it takes to lead, support and manage
people well for sustainable results.
The Investors in People Standard is underpinned by a
rigorous assessment methodology and a framework which
reflects the very latest workplace trends, essential skills and
effective structures required to outperform in any industry.
The Investors in People review process is one of a number of
methods used to gain the views and opinions of employees
to inform the Group’s People Strategy and is a key element
of the Group’s open and transparent culture.
Employee Voice
In addition to gaining feedback through Investors in People
the Group conducts regular employee opinion ‘Your Voice’
surveys.
Towards the end of 2017, the Group again engaged an
independent specialist to run the annual Your Voice
employee engagement survey, and 81% of employees
The Group’s Greenhouse Gas emissions
participated (2016: 84%). Although the results showed
a small decline in the employee engagement score
(78% versus 85% from the previous year), across the majority
of key survey areas the scores were significantly higher than
the external benchmark, which is drawn from other similar
sized companies in the Group’s sector. Of particular note
were the following results:
• 95% of employees understand the Secure Trust Bank
values.
• 83% of employees stated that they believe they can make
a valuable contribution to the Group.
• 85% of employees consider customers to be central to the
Group’s strategy.
The presentation of this year’s survey results to employees
sets out the progress made in addressing issues raised in the
previous survey. Actions plans will be developed during 2018
to address areas of improvement identified from this year’s
survey.
The Bank also operates an Employee Council which has
department representatives elected by their colleagues.
The Council meets on a regular basis and encourages a
two way process of communication between employees
and senior managers. The aim of the Employee Council is
to further promote employee engagement and provide a
structured forum for teams to share their views.
Various initiatives have been implemented following
feedback from this group. Most notably in 2017 were the
enhancements to the relaunch of ‘Boost’ which is the Group
Employee benefit and discount platform.
Employee Development
Continued investment in employee development remains
a priority with over 70 external qualifications recognised in
2017. In addition to the qualifications completed the Group
had another record number of employees sign up to study
towards an external Banking Qualification as part of their
career development. The Banking Qualifications are
delivered by the London Institute of Banking & Finance
(previously the IFS) and are available to all employees.
Scope 1 – direct emissions from combustion of fuel
Scope 2 – indirect emissions from electricity purchased
Scope 3 – other indirect emissions from purchased electricity transmission and distribution
Total scope 1 to 3 emissions
Environmental intensity indicator (tonnes carbon dioxide per £1 million group income)
54
2017
Carbon dioxide
(tonnes)
2016
Carbon dioxide
(tonnes)
26.7
501.7
152.7
681.1
4.2
93.0
555.6
50.3
698.9
5.4
Strategic Report
Corporate Governance Report
Financial Statements
Banking Qualifications are just one of a number of opportunities
created to study towards a range of professional qualifications
which range from Apprenticeships to MBAs. In partnership
with the National Skills Academy for Financial Services the
Group commenced a development programme for
Operational Team Leaders that enables them to achieve the
Institute of Leadership and Management Level 3 qualification.
This programme is designed to provide additional skills in core
leadership disciplines for these critical customer facing roles.
Secure Trust Bank Group has been awarded Platinum
Approved Status for both professional and trainee
development by the Association of Chartered Certified
Accountants, one of the world’s leading professional
accountancy bodies. The accreditation joins the Chartered
Institute of Management Accountants Premier Partner status
which is already held by STB Group and demonstrates the
high industry standards of both accountancy training
schemes, and continuing professional development
programmes, offered by the Group.
External development and wider career skills development
is supported by a comprehensive in-house learning
and development programme and induction process.
To encourage teams to learn new skills and embrace learning
opportunities the Group continues to participate in National
Learning at Work Week where employees showcase their
wider talents or participate in workshops on a wide range
of engaging topics. In 2017 the Group also launched the
Connect & Learn scheme as a result of feedback from the
Your Voice employee survey. This scheme allows colleagues to
draw on the expertise in other areas of the Group by setting up
structured sessions with other teams. The focus on employee
development has helped result in a record 90 employees
promoted or moved in to new roles during the year.
The Group continues to take steps to address the wider needs
and concerns of its staff. Existing employee support services
have been supplemented by new initiatives, including further
‘Wellbeing at Work’ activities which provide a focus on
employees’ mental and physical health. A number of People
Managers attended training in partnership with Mind and
Samaritans, and Mental Health Awareness training now forms
an integral part of the core development programme for all
People Leaders.
Employee engagement and recognition
Research has consistently shown a clear link between
enhanced levels of performance and teams that are fully
engaged and share the values of the organisation that they
work for. The positive performance of Secure Trust Bank
Group is a result of the efforts of employees and to ensure
that colleagues are recognised for this contribution there
are a number of schemes in place to celebrate exceptional
performance and behaviours.
These schemes together with the Group’s annual incentive
programme continue to help embed excellence within the
culture.
Awards
The prestigious Customer Service
Excellence Award was developed by
the Cabinet Office to acknowledge
excellence in public services.
Accreditations
IiP is an exacting national
standard that helps
organisations to improve
performance through their
people and also strive for
continuous improvement.
These schemes include:
e thank you cards and Be Valued awards: Being thanked is
something that everyone appreciates and it makes individuals
feel valued and helps create job satisfaction. For those
occasions when colleagues deserve a thank you and
behaviours are observed that truly reflected one of the
Company values, colleagues can recognise each other by
sending an e thank you card. Where behaviour has been
exceptional, line managers have the opportunity to reward
team members with a Be Valued award which includes a
gift and certificate. Colleagues can nominate their peers
whenever and as often as they like and in 2017 over
1,200 e cards were sent.
Customer Service Excellence Awards: colleagues who go the
extra mile when it comes to exceptional internal and external
customer service are recognised at monthly Customer
Service Excellence Awards.
Outstanding achievers: these are given to colleagues who
stand out for their fantastic contribution to the business.
Winners are nominated by their peers and then selected by
a panel of judges.
Incentive programme: the Group’s incentive scheme links
tangible performance targets which are based on the Group’s
strategy and values, to the outcomes of the scheme.
Long Service awards: to recognise loyalty and commitment
to the Group, long service is awarded at key milestones from
5 years of service. Colleagues are rewarded with a cash
payment, engraved pen, bottle of champagne, certificate
and are also invited to lunch with the head of their business
area. In 2017 590 years of long service were recognised.
www.securetrustbank.co.uk
55
Secure Trust Bank PLC Annual Report & Accounts 2017
Straightforward transparent banking
Corporate responsibility
continued
Gender diversity
At the year end, the split by gender of the Group’s
employees was as shown in the table below.
The Group is committed to diversity in the workplace at
all levels. During the early months of 2018, the Group is
supporting a range of initiatives to demonstrate this
commitment. The first is the launch, on International
Women’s Day, of an exciting partnership with everywoman
which gives all colleagues, regardless of gender, access to
the everywomanNetwork, a highly acclaimed, online
development tool, with a particular focus on empowering
women to take control of their career development.
Customers first
With today’s customer now having wider choice and access
to more information than ever before the quality of the
customer experience has never been more important and
this is ingrained in the Group’s values and mission to provide
straightforward and transparent banking. The focus on
creating a culture where every interaction is seen as an
opportunity to exceed our customers’ expectations is driven
through specific initiatives and lived through day-to-day
processes and interactions. This culture is reinforced through
recognition and reward structures and a series of
independent monitoring tools which facilitate a continuous
process of customer service review and improvement.
The Group has used FEEFO, an independent global ratings
and reviews provider used by the world’s most trusted brands
for the last four years to collect customer feedback. Customer
comments and ratings are published in real time on the
Group’s website and used to monitor and maintain service
levels. The Group’s average FEEFO rating for the year based
on over 1,200 reviews stood at 4.7 out of 5 in
December 2017 and all poor ratings are followed up by
attempting to resolve the issue with the customer.
This year the Group was also delighted to be awarded three
FEEFO Gold Trusted Service awards. This is an independent
seal of excellence that recognises businesses for delivering
exceptional experiences, rated by real customers. They are
based purely on customer feedback and awarded on
performance. The Group received the gold accolade for
products offered under its Secure Trust Bank, V12 and
Moneyway brands.
Gender diversity
Directors
Senior managers
Other employees
All employees
56
FEEFO ratings and comments are available on the Group’s
websites:
www.securetrustbank.co.uk
www.moneyway.co.uk
Having been the first bank to be awarded the Customer
Service Excellence Award, this year the Group was pleased to
announce that it had retained the standard for the fifth year
running. This Government backed accolade tests in great
depth those areas that research has indicated are a priority
for customers, with particular focus on delivery, timeliness,
information, professionalism and staff attitude. There is also
emphasis placed on developing customer insight,
understanding the user’s experience and robust
measurement of service satisfaction. The assessment report
noted that “it was evident when speaking to leaders and
front line staff within STB Group that they are highly
motivated to achieve the best possible service for their
customers.”
In addition to independent assessments of customer service
levels, the Group’s internal recognition schemes are all built
around reinforcing the Group’s values and culture and the
Group’s Team Recognition Award clearly demonstrates how
effective these are in driving the right behaviours. Focusing
on customer service, this award ran throughout 2017 with
18 teams taking part across the Group, and resulted in the
clear delivery of tangible improvements in customer service.
By order of the Board
Neeraj Kapur
Chief Financial Officer
21 March 2018
Male
Female
75%
80%
44%
47%
25%
20%
56%
53%
Chairman’s introduction
On behalf of the Board I am pleased
to introduce our report on Corporate
Governance. This explains the Group’s
governance arrangements and how the
Group has applied the principles of the UK
Corporate Governance Code (the ‘Code’).
The Board is committed to maintaining high standards of
corporate governance. The Board strengthened our
governance framework in 2017 as we implemented the
Remuneration Policy approved at the 2017 Annual General
Meeting and changed the composition of our Committees.
The Board has considered comments made by some
shareholders in relation to resolutions proposed at our 2017
Annual General Meeting, including on Executive Director
remuneration. The Board has listened to those comments.
The Chairman of the Remuneration Committee addresses
executive remuneration on page 82. Reflecting on those
comments and in contemplation of the proposed changes
to the Code announced by the FRC in December 2017,
Sir Henry Angest has decided to step down from the
Remuneration Committee and Andrew Salmon has decided
to step down from the Remuneration and Audit Committees,
both with effect from 31 March 2018. Both will continue to
remain members of the Board and to play an active role in
our discussions.
The Board has discussed the implications of the proposed
changes to the Code and the impact upon STB as a smaller
company. The Board will continue to monitor the proposed
changes as they move from consultation to implementation
and will respond appropriately to the changes.
The Board looks forward to engaging with shareholders at
the Annual General Meeting to be held on 16 May 2018.
Lord Forsyth
Chairman of the Board
www.securetrustbank.co.uk
Strategic Report
Corporate Governance Report
Financial Statements
Corporate governance report
Board
Chairman’s introduction
Board of Directors
Corporate governance statement
Corporate governance statement
Risk management
Nomination Committee
Statement by the Chairman
of the Nomination Committee
Nomination Committee report
Audit Committee
Statement by the Chairman
of the Audit Committee
Audit Committee report
Risk Committee
Statement by the Chairman
of the Risk Committee
Risk Committee report
Remuneration
Statement by the Chairman
of the Remuneration Committee
Operation of the Remuneration
Committee
Remuneration report
Directors Remuneration Report for 2017
Summary remuneration policy
Directors’ report
Directors’ responsibility statement
Independent Auditor’s report
57
58
61
66
69
70
72
73
78
79
82
83
85
86
94
98
102
103
57
Secure Trust Bank PLC Annual Report & Accounts 2017
Straightforward transparent banking
Board of Directors
7
6
2
4
8
1
5
3
9
Audit Committee members
Risk Committee members
Assets and Liabilities Committee members
Remuneration Committee members
Nomination Committee members
58
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Corporate Governance Report
Financial Statements
1.
The Rt Hon Lord Forsyth of Drumlean PC Kt
Non-Executive Chairman
3.
Ann Berresford ACA
Independent Non-Executive Director
Appointed to the Board on 1 March 2014 as an Independent
Non-Executive Director and appointed Chairman of the
Company on 19 October 2016.
Skills and experience
Lord Forsyth is a former Chairman of Hyperion Insurance
Group, and former Deputy Chairman of JP Morgan UK and
Evercore Partners International. He was appointed to the
Privy Council in 1995, knighted in 1997, and joined the
House of Lords in 1999. He was a member of the House
of Commons for 14 years and served in Government for
10 years, latterly as a Cabinet Minster. His background in the
public and private sectors has given Lord Forsyth a broad
experience of a number of matters relevant to the business
of the Group including strategy, governance, operations,
marketing, risk and human capital.
Other appointments include:
Lord Forsyth is a director of J&J Denholm Limited and
Denholm Logistics Limited and Chairman of the House
of Lords Economic Affairs Committee.
2.
Sir Henry Angest LLL
Non-Executive Director
Appointed to the Board on 28 January 1982.
Skills and experience
Sir Henry Angest is an experienced and respected banker.
He is a past Master of the Worshipful Company of International
Bankers, Chairman and Chief Executive of Arbuthnot Banking
Group and Chairman of Arbuthnot Latham & Co., Limited.
He gained extensive national and international experience
as an executive of The DOW Chemical Company and DOW
Banking Corporation. He was chairman of the banking
committee of the London Investment Banking Association
and a director of the Institute of Directors. He has a law
degree from the University of Basel. During his career, Sir Henry
has gained extensive experience in leadership, general
management, corporate strategy, acquisitions, banking
operations, human capital, legal and risk.
Other appointments include:
Sir Henry is Chairman of Arbuthnot Banking Group PLC and
of its subsidiary Arbuthnot Latham & Co., Limited. Sir Henry
was appointed by Arbuthnot Banking Group to the Board of
Secure Trust Bank PLC.
Appointed to the Board on 22 November 2016 and appointed
Chairman of the Audit Committee on 23 September 2017.
Skills and experience
Ann Berresford is a Chartered Accountant with a background
in the financial services and energy sectors. She has held
positions at Bath Building Society, the Pensions Regulator,
Hyperion Insurance Group, Triodos Renewables plc, the
Pension Protection Fund, Bank of Ireland Group, Clyde
Petroleum plc and Grant Thornton. Her career has given
Ann experience in mortgages, pensions, operations,
accounting, finance and risk.
Other appointments include:
Ann is a non-executive director of Albion Venture Capital
Trust PLC.
4.
Neeraj Kapur B.Eng, ACGI, FCA, CF, FCIBS
Chief Financial Officer
Appointed to the Board on 31 May 2011.
Skills and experience
Neeraj Kapur has over 25 years’ financial services experience
spent in both the accounting and banking industries. He
holds a degree in Aeronautical Engineering from Imperial
College, London, is a fellow of the Chartered Institute of
Bankers in Scotland, a fellow of the Institute of Directors,
a fellow and a member of the Council of the Institute of
Chartered Accountants in England & Wales (‘ICAEW’),
and Chair of the ICAEW Financial Services Faculty. Neeraj
qualified as a Chartered Accountant in 1993 at Arthur
Andersen and spent 11 years working in professional
practice. He joined RBS in 2001 where he performed a
number of roles which included Chief Financial Officer of
Lombard North Central PLC. His background has given
Neeraj experience in accounting, finance, professional
services, governance, operations, marketing and risk.
Other appointments include:
Member of the Council of the ICAEW.
www.securetrustbank.co.uk
59
Secure Trust Bank PLC Annual Report & Accounts 2017
Straightforward transparent banking
Board of Directors
continued
5.
Paul Lynam ACIB, AMCT, Fifs
Chief Executive Officer
7.
Andrew Salmon ACA
Non-Executive Director
Appointed to the Board on 13 September 2010. Chairman
of the Assets and Liabilities Committee.
Skills and experience
Paul Lynam joined Secure Trust Bank as Chief Executive
Officer, having spent 22 years working for NatWest and
RBS. Prior to leaving RBS, Paul was the Managing Director,
Banking, for RBS/NatWest’s SME banking business across
the UK. Before that Paul spent four years as the Managing
Director of Lombard North Central PLC. During his career
Paul has undertaken roles in branch banking, business
banking, corporate and commercial banking, asset finance,
invoice finance, strategy, performance management, lending
and central head office functions. Paul is a member of the UK
Finance Board, the recognised trade body for the finance
industry, leading on Challenger Banks and SME customer
interests. He also chairs the Specialist Bank Strategic Advisory
Committee. He is a Fellow of the IFS University College and
an Associate of the Chartered Institute of Bankers and the
Association of Corporate Treasurers.
Other appointments include:
Paul is a director of Arbuthnot Banking Group and a member
of the UK Finance Board, as well as a member of the faculty
of the School for CEOs.
6.
Paul Marrow ACIB
Independent Non-Executive Director and Senior
Independent Director
Appointed to the Board on 3 March 2011. Chairman of the
Risk Committee.
Skills and experience
Paul Marrow has over 40 years’ banking experience and has,
in the past, been responsible for the Commercial Banking
and Specialist Corporate Banking business divisions of RBS
Group in the UK and been the chair of JCB Finance Limited.
Paul served for a number of years as Chair of the Group Audit
Committee and was Chairman of Everyday Loans Group.
During his career, Paul has gained experience in governance,
risk, finance, accounting, operations and corporate strategy
across a wide range of banking disciplines.
Other appointments include:
Paul is an independent non-executive director of Arbuthnot
Latham & Co., Limited, a wholly owned subsidiary of
Arbuthnot Banking Group.
Appointed to the Board on 8 July 2003.
Skills and experience
Andrew Salmon joined Arbuthnot Banking Group in 1997
and is its Chief Operating Officer and Head of Business
Development. He was previously a director of Hambros Bank
Limited and qualified as a Chartered Accountant with KPMG.
His professional qualification and background in the financial
services sector has given Andrew experience in remuneration,
governance, operations, accounting, finance, marketing,
risk and compliance.
Other appointments include:
Andrew is a Director of Arbuthnot Banking Group PLC and
its subsidiary Arbuthnot Latham & Co., Limited. Andrew was
appointed by Arbuthnot Banking Group to the Board of
Secure Trust Bank PLC.
8.
Victoria Stewart
Independent Non-Executive Director
Appointed to the Board on 22 November 2016, appointed
Chairman of the Remuneration Committee on 21 July 2017
and appointed as a member of the Nomination Committee
on 28 February 2018.
Skills and experience
Victoria Stewart was for many years a fund manager and
investor in UK small companies. Victoria has knowledge of
corporate structures and capital markets with particular
experience in smaller companies listed on the Main Market
and AIM. She has held a number of positions at Royal
London Group and Chiswell Associates (formerly Cantrade
Investment Management Limited and now part of Sarasin &
Partners). Her background has given Victoria experience in
remuneration, governance, operations, investor relations,
accounting, finance and risk.
Other appointments include:
Member of the ICAEW Corporate Governance Committee.
9.
Alan Karter LLB (Hons)
Company Secretary
Alan Karter is a Scottish and English qualified solicitor and
a former partner of Simmons & Simmons LLP. He joined
Arbuthnot Banking Group as Head of Legal Affairs in February
2012 and was appointed Company Secretary of Secure Trust
Bank PLC on 31 August 2014. On 1 September 2016 he
transferred his employment from Arbuthnot Banking Group to
the Company and was appointed to the dual role of General
Counsel and Company Secretary of Secure Trust Bank.
60
Strategic Report
Corporate Governance Report
Financial Statements
Corporate governance statement
Composition
Key:
NED
ED
INED
25%
25%
50%
Meeting attendance
Key:
Board
98.75%
Gender Diversity
Key:
Women
Men
25%
75%
UK Corporate Governance Code (‘Code’) –
Statement of Compliance
The Code sets out principles relating to good governance
of companies. The Code is available at www.frc.org.uk.
Throughout the period under review, the Company was
subject to the Code.
The Board confirms that from 1 January 2017 to the date
of this report the Group has complied with the
requirements of the Code save that, until the appointment
of Ann Berresford as a member of the Nomination
Committee, a majority of the members of the Nomination
Committee were not independent Non-Executive Directors.
This was rectified on 21 February 2017.
The following sections of this report describe how the
Board has applied the principles of the Code and describes
the Group’s governance arrangements with particular
reference to leadership, effectiveness, accountability,
remuneration and relations with shareholders.
Section A: Leadership
Role of the Board
The Board is led by the Chairman. The Board provides
strategic leadership to the Group, sets the Group’s long
term strategic objectives and exercises oversight over
the implementation of the strategy and the activities of
management. The Board is responsible to shareholders for
promoting the long term success of the Group. The setting
of a risk appetite and the oversight of risk management
practices is an important part of the role of the Board.
The Board meets regularly and, both as a Board and
through its committees, provides direction, oversight
and challenge of and to management. The Board has
delegated specific authorities to its committees as set
out in each committee’s terms of reference. The Board
exercises oversight of the work of its committees and
receives updates on the work of each committee at
Board meetings.
There is a schedule of matters reserved for consideration
by the Board. Matters reserved for exclusive determination
by the Board include the determination of dividends,
material acquisitions or disposals and the issue of new
shares.
The Board has delegated authority to executive
management to run the business and to implement the
strategy set by the Board. Two members of executive
management, the CEO and the CFO, are members of
the Board.
www.securetrustbank.co.uk
61
NED: Non-Executive Director
ED:
INED:
Executive Director
Independent
Non-Executive Director
Secure Trust Bank PLC Annual Report & Accounts 2017
Straightforward transparent banking
Corporate governance statement
continued
Board composition
The Board meets formally at least eight times a year and
otherwise as required. The number of planned meetings held
during 2017 and the attending directors are shown in the
table at the base of this page.
There are eight members of the Board as set out in the chart
on page 61. Biographical details for each director can be
found on pages 59 to 60 together with their roles and
membership of Committees. Further information on Board
effectiveness, Non-Executive Director evaluation and
independence can be found on page 63 to 64.
The Code recommends that the Board should appoint one
of the independent Non-Executive Directors as Senior
Independent Director. The Senior Independent Director
should be available to shareholders if they have concerns
which contact through the normal channels of Chairman,
Chief Executive Officer or other Executive Directors has
failed to resolve or for which such contact is inappropriate.
The Board has appointed Paul Marrow as the Senior
Independent Director.
Role of the Chairman
The Chairman’s role is to ensure good corporate
governance and the smooth and effective operation of
the Board. His responsibilities include leading the Board,
ensuring the effectiveness of the Board, supporting effective
communication with shareholders, setting the Board’s
agenda and ensuring that all Directors are encouraged
to participate fully in the activities and decision making
process of the Board.
The Chairman of the Board and the Chairmen of the
Remuneration, Risk and Audit Committees and the Senior
Independent Director, together with the Chief Executive
Officer and Chief Financial Officer, are all Senior Managers
for the purposes of the Senior Manager Regime.
Board membership and meetings
Number of meetings during 2017
Lord Forsyth (Chairman)
Sir Henry Angest
Ann Berresford
Neeraj Kapur
Paul Lynam
Paul Marrow (Senior Independent Director)
Andrew Salmon
Victoria Stewart
Separation of roles of Chairman and Chief Executive
The roles of the Chairman and the Chief Executive Officer are
separate, clearly defined in writing and have been approved
by the Board.
Meetings
The Board meets at regular intervals. There is a
comprehensive Board pack and agenda which is circulated
in advance of the meeting and minutes and actions are
documented. There is an annual Board calendar at which
certain items are considered by the Board at certain times
of the year, including the report and accounts, regulatory
filings and review of risk appetite. Additional meetings of the
Board are held as required and, in addition to the standing
committees of the Board, the Board may appoint ad hoc
committees to deal with particular matters from time to time.
Company Secretary
The Company Secretary or the Deputy Company
Secretary acts as Secretary to the Board and its Committees
and is responsible for ensuring that Board processes and
procedures are followed and support effective decision
making. All directors have access to the Company Secretary’s
advice and services. Directors may obtain independent
professional advice in the course of their duties, if necessary,
at the Company’s expense in order to assist them in carrying
out their duties.
The Company Secretary provides support and acts as a
first point of contact for the Chairman and Non-Executive
Directors. The Company Secretary is also responsible for
the induction of new independent Non-Executive Directors.
In 2017 a Deputy Company Secretary was appointed.
Board
10
10/10
9¹/10
10/10
10/10
10/10
10/10
10/10
10/10
¹ Sir Henry was unable to attend one meeting as telecommunications into the meeting from his location were unreliable.
62
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Financial Statements
The role of the members of the Board
The Chairman leads the Board and sets the Board’s agenda
with the support of the Company Secretary.
Election of Directors
The Articles of Association contain provisions for the
retirement by rotation of directors.
The Chief Executive Officer is responsible for the day-to-day
management of the Group within the delegated authorities
and risk appetite approved by the Board. He recommends
the Group strategy and leads the executive management
team in the execution of the strategy approved by the Board.
He leads the relationship with institutional shareholders and
ensures that timely and accurate information is disclosed to
the market.
The Chief Financial Officer manages the Group’s financial
affairs and supports the Chief Executive Officer in the
management of the business. He has particular responsibility
for the financial and regulatory reporting of the Group and
balance sheet and liquidity management.
The Senior Independent Director acts as a sounding
board for other Non-Executive Directors and the Chairman.
The Senior Independent Director also conducts the Chairman’s
annual performance evaluation, collecting views from the
other Directors.
The Non-Executive Directors provide independent and
constructive challenge of the Executive Directors and
scrutinise the delivery of the strategy within the risk and
control framework set by the Board. Non-Executive Directors
also determine Executive Director remuneration.
Executive management
The Chief Executive Officer and Chief Financial Officer are
supported by an executive team who sit on an Executive
Committee which operates under authorities delegated
from the Board.
Below the Executive Committee there is a comprehensive
governance structure involving a number of committees
linked to business lines and functions. Details of that
structure can be found on the Company’s website
www.securetrustbank.co.uk
Committees
The Board has established Audit, Nomination, Remuneration
and Risk Committees. There is also an Assets and Liabilities
Committee (‘ALCO’) and an Assumptions Committee both
of which report to the Risk Committee. Each committee has
formally delegated duties and responsibilities and written
terms of reference. The terms of reference of the Board
committees are available on www.securetrustbank.co.uk.
All Board committees have access to independent advice
and the services of the Company Secretary.
Further information about the Board committees is set out
later in this governance report, including information about
membership of the committees, meetings held during the
year and the attendance of committee members.
Lord Forsyth and Paul Marrow retire under Article 82
of the Articles of Association and, being eligible, offer
themselves for re-election at the 2018 Annual General
Meeting. Both Lord Forsyth and Paul Marrow have
contributed significantly to the success of the Group,
providing advice and guidance to management as well as
oversight of shareholders’ interests. Paul Marrow is a former
Audit Committee Chairman and is the Risk Committee
Chairman. He is also the Whistleblowers’ Champion.
In accordance with the provisions of the Code, having served
as Directors for longer than nine years, Sir Henry Angest and
Andrew Salmon retire and offer themselves for re-election
at the 2018 Annual General Meeting. Sir Henry Angest,
who was chairman of the Company until the appointment
of Lord Forsyth as Chairman in October 2016 has steered
the Group through its development. He has demonstrated
significant entrepreneurial flair in his leadership of the
Group and the Board continues to value his wise counsel.
Andrew Salmon, who has been a director of the Company
since 2003, has contributed significantly to the success of
the Group, providing advice and guidance to management.
The Board recommends the re-election of Lord Forsyth,
Sir Henry Angest, Paul Marrow and Andrew Salmon at the
2018 Annual General Meeting. Further information about
them can be found on pages 59 to 60.
Section B: Effectiveness
Appointments to the Board
Appointments to the Board are the responsibility of the
full Board, on the recommendation of the Nomination
Committee. On appointment, new Non-Executive Directors
enter into a formal appointment letter which sets out the
terms and conditions of their appointment as Non-Executive
Directors. The terms and conditions of appointment of the
Non-Executive Directors and the service contracts of
Executive Directors are available for inspection at the Group’s
registered office during normal business hours. All the
Non-Executive Directors (other than Ann Berresford and
Victoria Stewart) entered into new letters of appointment
on 6 October 2016. Ann Berresford and Victoria Stewart
entered into letters of appointment on 22 November 2016.
The letters of appointment were amended in January 2018
to reflect changes to the composition of the Board’s
Committees and associated changes to individual
Non-Executive Director responsibilities.
www.securetrustbank.co.uk
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Secure Trust Bank PLC Annual Report & Accounts 2017
Straightforward transparent banking
Corporate governance statement
continued
Induction, training and professional development
On appointment, all new directors receive a comprehensive
and tailored induction. The induction involves provision of
information about the Group as well as face-to-face meetings
with directors and senior management. New directors have
access to historic Board material, including the prospectus
and other Admission related documentation. New directors
are also provided with briefing notes on regulatory and legal
matters, including their duties and responsibilities under the
Companies Act 2006.
Further information on Board training and development can
be found on page 71.
Board effectiveness
The composition of the Board and its committees and the
performance of directors were rigorously evaluated during
the year. More details can be found on page 71.
Formal evaluations of the performance of the Audit and
Risk committees took place during the year and the result
of those evaluations was that the performance of each
committee was considered to be satisfactory. Following the
change to the Chairman of the Remuneration Committee
and the adoption and implementation of the Remuneration
Policy during the year, formal evaluation of the committee
has been deferred until mid-2018 to allow the committee
the opportunity to work through a full annual cycle of
remuneration under the leadership of the current Chairman.
The Board conducted a formal self-evaluation of the
effectiveness of the Board to assess its effectiveness and
how it performs, along with other Board related governance
matters, including the provision of information to the Board.
Further details can be found on page 71.
Diversity
The Board of STB has adopted a Board policy on diversity,
which addresses gender, race, ethnicity, age, disability,
religious belief, sexual orientation, marital status, gender
reassignment and pregnancy (together “Diversity”).
The Board embraces the benefits of Diversity in the
boardroom and considers that Diversity benefits governance.
In considering the appointment of new directors, the Board
will give careful consideration to Diversity as well as the skill,
experience and knowledge of the candidates. The Board’s
approved Board Diversity Policy operates in conjunction with
the Equality and Diversity Policy applicable throughout the
Group. Appointments to the Board are made on merit and
having regard to the balance of skills and experience of the
Board and the candidates. The Board has not set targets for
representation of any particular group on the Board. Female
membership of the Board currently stands at 25%. BAME
membership currently stands at 12.5%.
64
Section C: Accountability
The Board has delegated authority to the Audit, Nomination,
Remuneration and Risk Committees to exercise oversight of
aspects of the operations of the Group.
Conflicts of interest
All Directors are required to disclose to the Board any outside
interests which may pose a conflict with their duties to the
Group. The Board is required to approve any actual or
potential conflicts of interest. On appointment new Directors
are required to disclose their other interests. Conflicts of
interest are also governed by the Articles of Association
of the Company and company law.
Financial reporting
A description of the responsibilities of the directors in relation
to the preparation of the annual report and accounts is set
out on page 102.
The approach taken by the Board to ensuring that the annual
report and accounts are fair, balanced and understandable
is set out on page 75 and the information necessary for
shareholders to assess the Company’s position and
performance is set out in the Strategic Report starting on
page 2.
A statement of the responsibility of the external auditors in
relation to the report and accounts is set out on page 109.
An explanation of the business model and the strategy for
delivering the objectives of the Company is set out on
pages 2 to 3.
The basis on which the Board reached its decision to
adopt the going concern basis of accounting is described
on page 75.
Internal control
The Board has overall responsibility for the Group’s system
of internal control and for reviewing its effectiveness. Such a
system is designed to manage rather than eliminate risk of
failure to achieve business objectives and can only provide
reasonable but not absolute assurance against the risk of
material misstatement or loss.
The Board has adopted a Group risk appetite statement
which sets out the Board’s attitude to risk and internal control.
Key risks identified by the Directors are formally reviewed
and assessed at least once a year by the Board and are also
reviewed by the Risk Committee at its meetings. Key business
risks are also identified, evaluated and managed on an
ongoing basis by management. The Board and the Risk
Committee also receive regular reports on any material risk
matters. Significant risks identified in connection with the
development of new activities are considered by the Board
and the Risk Committee in conjunction with the approval of
any such new activity.
Strategic Report
Corporate Governance Report
Financial Statements
The effectiveness of the internal control system is reviewed
regularly by the Board and the Audit Committee, which also
receives reports of reviews undertaken by the internal audit
function. The Audit Committee also receives reports from the
external auditors, KPMG LLP, which include details of internal
control matters that they have identified. Certain aspects of
the system of internal control are also subject to regulatory
supervision, the results of which are monitored closely by the
Board and its Committees.
Section E: Relations with shareholders
The Company maintains a regular dialogue with its principal
shareholders and makes full use of the Annual General
Meeting to communicate with investors. All Directors are
expected to make themselves available to shareholders at
the Annual General Meeting. The Chairmen of the Board
Committees will be available at the Annual General Meeting
to answer questions about the work of their committees.
Key elements of the Group’s system of internal control
include regular meetings of the Executive and business unit
risk committees, together with annual budgeting, monthly
financial and operational reporting for all businesses within
the Group. Conduct and compliance are monitored by
management, the Risk team, Internal Audit and Compliance
and, to the extent necessary to support its audit report, the
external auditor. Oversight is also exercised by the Board and
Board Risk Committee.
The Board recognises the importance of maintaining good
relationships with shareholders. The Chief Executive Officer
and the Chief Financial Officer would normally expect to
meet with institutional shareholders on a regular basis,
including following the publication of financial information
or updates by the Group. The Chairman has joined them in
some meetings throughout 2017. The Group’s brokers also
facilitate communication between the Group and its
institutional shareholders.
During 2017 the Group continued to invest in its risk
management capability and this ongoing investment will
continue during 2018.
The Board regularly reviews actual and forecast performance
compared with annual plans as well as other key performance
indicators as described on pages 14 to 19.
Lines of responsibility and delegated authorities are clearly
defined. The Group’s policies and procedures are reviewed
and regularly updated and a training programme applies in
relation to the roll-out of policies.
Section D: Remuneration
Details regarding the remuneration of the Directors, the
governance processes connected with remuneration and the
operation of the Directors Remuneration Policy can be found
on pages 82 to 84.
The Chairman is responsible for ensuring that appropriate
channels of communication are established between the
Directors (and in particular the Chief Executive Officer and
Chief Financial Officer) and shareholders and that the views
of shareholders are made known to the Board.
The Chief Executive Officer provides written reports prepared
by the Group’s brokers to all Directors on meetings held with
institutional shareholders.
The Group recognises the importance of ensuring effective
communication with its shareholders. An annual financial
report is distributed to all shareholders. This report, together
with the half-yearly financial report, regulatory announcements
and current details of the Group’s share price are made
available on the Company’s website.
Annual General Meeting
The Group’s Annual General Meeting will be held at
Arbuthnot House, 7 Wilson Street, London, EC2M 2SN at
3.00 p.m. on Wednesday 16 May 2018. The Notice of Annual
General Meeting, together with an explanation of the items
of business to be discussed at the meeting will be posted to
shareholders and made available at www.securetrustbank.co.uk.
Members of the Board will be in attendance at the 2018
Annual General Meeting which will provide an opportunity to
engage with shareholders and to respond to any questions
from shareholders.
Approval
This corporate governance statement was approved by the
Board on 21 March 2018 and signed on its behalf by:
A J Karter
Secretary
www.securetrustbank.co.uk
65
Secure Trust Bank PLC Annual Report & Accounts 2017
Straightforward transparent banking
Risk management
A fundamental element of the Group’s
strategy is the effective management of risk
in order to protect the Group’s depositors,
borrowers and shareholders, and to ensure
that the Group maintains sufficient capital,
liquidity and operational control at all times,
and acts in a reputable way.
Overview
This is reflected in the Group’s strategy and values, in
particular the ‘Sustain’ strategy and ‘Risk Aware’ value,
which demonstrate the Group’s commitment to protect the
reputation, integrity and sustainability of the Bank for all of its
customers and stakeholders through prudent balance sheet
management, investment for growth and robust risk and
operational control.
The Group’s Chief Risk Officer is responsible for leading the
Group’s Risk Function, which is independent from the Group’s
operational and commercial functions. The Risk Function is
responsible for ensuring that appropriate risk management
processes and controls are in place, and that they are
sufficiently robust, so as to ensure that key risks are identified,
assessed, monitored and mitigated. The Chief Risk Officer is
responsible for providing assurance to the Board that the
Group’s principal risks are appropriately managed and that
it is operating within its risk appetite.
The Group’s risk management framework, policies and
procedures are regularly reviewed and updated to ensure
that they accurately identify the risks that the Group faces in
its business activities and are appropriate for the nature,
scale and complexity of the Group’s business.
Group risk appetite statement
The Group risk appetite statement confirms the risk
parameters within which the strategic aims and vision of the
Group are to be achieved. The Board has identified risk
themes, risk drivers and major risk categories relevant to the
business to enable it to produce the risk appetite statements,
set out below, which underpin the strategy of the Group.
The Group risk appetite statement is subject to regular
monitoring and review.
Risk management framework
The Group’s risk management framework supports decision-
making across the Group and is designed to ensure that each
risk is managed, monitored and overseen through a
dedicated risk-specific committee. The Group operates a
‘Three Lines of Defence’ model for the management of its
risks in which each risk has a defined risk appetite which is
controlled and managed through documented policies
and frequent reporting, and is overseen by one or more
committees as part of the Group’s governance process.
The Group’s governance structure in respect of risk is
summarised in the table on page 67, which sets out for each
risk the relevant policy governing the risk, the method
of reporting and the responsible committee(s).
Group risk appetite statement
Key theme
Risk appetite statement
Profitability
The Group is profit and growth orientated whilst seeking to maintain a conservative and
controlled risk profile. The Group manages credit risk through a pricing for risk model, which
drives a potential post tax return on equity in excess of 20% in aggregate.
Financial strength The Group’s financial strength is safeguarded by a strong capital base and a prudent
approach to liquidity management. The Group’s governance and capital planning processes
and procedures are designed to ensure that capital levels will not fall below the Group’s
individual capital guidance requirements. Liquidity is maintained at a level above the overall
liquidity adequacy requirement with the majority of loans funded typically by retail deposits.
Conduct with
customers and
reputation
The Group conducts its business in a way that seeks to avoid negative outcomes for
customers by consistently treating them fairly. The Group is straightforward and fair with its
customers and seeks to achieve excellent customer service standards. The Group’s aim is to
be seen as a sound and professional business in the marketplace. It has no appetite for
reputational risk arising from the way in which it or its partners behave. It seeks to remain fully
compliant with all relevant regulatory requirements.
Risk categories
Market risk
Credit risk
Credit risk
Liquidity risk
Capital risk
Conduct risk
Business
processes and
people
The appetite of the Group for operational risk is to have well defined, scalable and controlled
processes, running on robust and resilient systems, effective delivery of change and business
continuity management. STB has a low tolerance for operational losses but understands that
losses may occur in the pursuit of its business objectives.
Operational risk
Regulatory risk
66
Strategic Report
Corporate Governance Report
Financial Statements
Risk governance
The Three Lines of Defence, when taken together, control
and manage risks in line with the Group’s risk appetite.
The three lines are:
First Line:
the Business Line Managers who own and
manage risk;
Second Line: functions that oversee or specialise in risk
management or compliance (Information
Security, Operational Risk, Financial Crime
and Compliance Teams); and
Third Line:
Internal Audit.
Each line of defence effectively ensures a robust operational
risk framework within the Group. The Group ensures that
each line understands its respective responsibilities and those
of the other lines, and has the appropriate resource and
expertise in order to fulfil its responsibilities.
First Line of Defence – Business Line Managers
As the First Line of Defence, the management and staff of
each business unit are responsible and accountable for
identifying, assessing, controlling and mitigating risks.
They are the owners of the risks and controls that operate
within their business.
Each business unit or subsidiary is responsible for the
recording and maintenance of its own risks, within the
statements of risk appetite, limits, tolerances and thresholds
articulated within the risk management framework, including
those set out in this document.
Second Line of Defence – Information Security, Operational
Risk, Financial Crime and Compliance Teams
The role of the Second Line of Defence is to support and
guide the first line of defence in operating within the risk
appetite. It does this by developing policies, providing
monitoring, oversight, support and challenge to the first line,
and aggregating and reporting risk related information
throughout the organisation.
Third Line of Defence – Group Internal Audit
Internal Audit provides the Audit Committee and senior
management with comprehensive, independent and
objective assurance on the effectiveness of risk governance,
risk management, and internal controls in the first and
second lines of defence. It reports significant risk exposures
and control issues to the Audit Committee.
Risk management framework
Risk
Credit
Market
Liquidity
Operational
Capital
Conduct
Regulatory
Key control
documents
Consumer
Credit Risk
Policy
Treasury
Policy and
ILAAP
Treasury
Policy and
ILAAP
Operational
Risk Policy and
Framework
ICAAP
Conduct Risk
Policy
Compliance
Manual
Reporting
Monitoring
committee
Business and
Commercial
Credit Risk
Policy
Credit Risk
Reports
Consumer
Credit Risk
Committee
SME Credit
Committee
ALCO and
Treasury
Reports
ALCO and
Treasury
Reports
Operational
Risk MI and
Reporting
ICAAP and
other capital
reports
Conduct Risk
MI and
Reporting
Compliance
Reports
ALCO
ALCO
ALCO
Group and
Business Level
Operational
Risk
Committees
Customer
Focus
Committee
Group
Compliance
and
Regulatory
Risk
Committee
Oversight
committee
Risk
Committee
Risk
Committee
Risk
Committee
Risk
Committee
Risk
Committee
Risk
Committee
Risk
Committee
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Secure Trust Bank PLC Annual Report & Accounts 2017
Straightforward transparent banking
Risk management
continued
The scope of this assurance covers a broad range of
objectives, including:
Group and recommends, initiates and monitors any further
mitigating action that is required.
• efficiency and effectiveness of operations
• safeguarding of assets
• reliability and integrity of reporting processes
• compliance with laws, regulations, policies, procedures,
and contracts.
The remit extends to a number of areas: group-wide
processes; subsidiaries; business units; business processes
including customer lifecycle, sales, marketing and operations;
and enabling functions such as finance, HR, operational risk,
compliance and IT.
The monitoring and control of risk is a fundamental
part of the management process within the Group.
The responsibilities of the Board, Risk Committee and
Audit Committee in this respect are described later in this
Corporate Governance Report. The following committees
also form a key part of the Group’s risk management
governance structure:
Assets and Liabilities Committee (‘ALCO’)
The ALCO is a sub-committee of the Risk Committee and
is responsible for implementing and controlling the liquidity
and asset and liability management risk appetite of the
Group, ensuring high level control over the Group’s balance
sheet and associated risks. The committee sets and controls
capital deployment, treasury strategy guidelines and limits
and focuses on the effects of future plans and strategy on
the Group’s assets and liabilities.
Consumer Credit Risk Committee
This committee ensures that there is control of credit and
lending decisions and related risks in respect of the Consumer
Finance businesses. Retail Finance and Motor Finance are
reviewed in alternate months to ensure a detailed analysis is
undertaken of the entire portfolio. This committee determines
whether the credit strategies and risk polices are working and
will make recommendations on any changes required.
SME Credit Committees
The Group operates a Credit Committee structure for
its Business Finance operations, with lending authorities
approved at the Board Risk Committee. There is no local
sales authority with all deals going via the respective Credit
Risk functions for manual underwriting and, where required
under the mandate approval, at the STB Credit Committee
level.
Group Operational Risk Committee
This committee reviews and monitors the adequacy,
the implementation and the level of embeddedness of the
operational risk management framework across the Group.
It recommends and undertakes improvements where required.
The committee assesses the operational risks across the
68
Group Compliance and Regulatory Risk Committee
This committee reviews and monitors regulatory change
with which the Group is required to comply and it provides
oversight that appropriate co-ordinated and controlled
action is taken to deliver the required changes to an
acceptable standard, which achieves compliance in a timely
manner. This committee also reviews and approves the
compliance risk management framework, the compliance
universe and annual monitoring plan, anti-money laundering
and financial crime systems of governance and control.
It ensures that the Compliance function offers close and
continual support to the First Line of Defence in
understanding regulatory requirements and delivery
of required outcomes.
Financial Crime Committee
This Committee ensures that fraud losses are maintained
within risk appetite, that anti-money laundering and other
financial crime related risks are well managed and that all
related regulatory responsibilities are complied with.
Customer Focus Committee
This committee reviews and challenges the customer
experience delivered by the Group, ensuring that treating
customers fairly principles, conduct risk, and customer service
excellence requirements are met and good customer
outcomes are achieved.
Information Security Management Committee
This committee oversees the Group’s management of
information, including safeguarding the personal information
of its customers.
IT Governance and Risk Committee
This Committee reviews and monitors the adequacy and
implementation of the Group’s IT Strategy and Policies.
It also reviews, challenges and assesses the key IT risks
across the Group and recommends, initiates and monitors,
where further mitigating action may be required.
Other Committees
The governance arrangements are kept under review
and changes made to respond to emerging needs.
An Assumptions Committee was established in 2017 for
the purpose of reviewing and challenging assumptions
used in a number of areas including the ICAAP and ILAAP.
The Assumptions Committee reports to the Risk Committee
via ALCO. The implementation of IFRS 9 required new
financial models to be produced and as a result a Model
Governance Committee is being established to review and
exercise oversight of financial models established and used
by the Group.
Strategic Report
Corporate Governance Report
Financial Statements
Statement by the Chairman
of the Nomination Committee
I am pleased to present the report of
the Nomination Committee in respect
of 2017. Following the appointment of
Ann Berresford and Victoria Stewart as
directors in November 2016, Ann and
Victoria have proven to be welcome
additions to the Board, enhancing the
Board’s collective experience and skills,
and providing fresh challenge and
oversight.
During 2017 the Committee has supported the new directors
as they settle into their roles, bringing their experience to
bear in the work of the Board and its Committees. Following
a recommendation from the Committee, I am delighted that
Ann has joined the Nomination Committee and has become
Chairman of the Audit Committee; and Victoria has become
Remuneration Committee Chairman. Both have received
thorough inductions into their respective roles and have had
the opportunity to meet senior members of the leadership
team and other employees.
At the end of 2017 the Board underwent a questionnaire
based performance evaluation which was conducted by the
Company Secretary under my direction. In addition I have
conducted individual evaluations with each of the Non-
Executive Directors; and Paul Marrow, as SID, has undertaken
an evaluation of me as Chairman, seeking feedback from
both the Executive and Non-Executive Directors.
The outcomes of those various evaluations are consistent
with a Board adapting to a new dynamic in terms of personnel,
leadership and being listed on the Main Market. There are
areas of excellence and areas for improvement. I am pleased
to report, however, that the Board has concluded it is both
performing well and is effective. Further information on
the evaluations can be found on page 71, together with
information on the activities of the Committee throughout
2017.
Since the end of the financial year, the Committee has
considered the Financial Reporting Council’s proposed
changes to the Code and specifically the impact those
changes may have upon the Board and the composition
of its Committees. As a consequence, following a
recommendation from the Committee, the Board appointed
Victoria Stewart as a member of the Committee with effect
from 28 February 2018. In addition, Sir Henry Angest has
decided to step down from the Remuneration Committee
and Andrew Salmon has decided to step down from the
Remuneration and Audit Committees, both with effect from
31 March 2018. Both will continue to remain members of
the Board and the Committee.
The Committee will continue to review the composition of
the Board and the Committees’ composition during 2018
having regard to proposed changes to the Code.
Lord Forsyth
Chairman of the Nomination Committee
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69
Secure Trust Bank PLC Annual Report & Accounts 2017
Straightforward transparent banking
Nomination Committee report
Nomination Committee membership and meetings
The Nomination Committee is composed of five members
and is therefore compliant with the Code provision
regarding the composition of the Nomination Committee.
The Chairman of the Committee is Lord Forsyth.
The Nomination Committee meets as frequently as its
chairman may require and also at regular intervals to deal
with routine matters and in any event not less than twice in
each financial year. The number of planned meetings held
during 2017 and the attending directors are shown in the
table at the bottom of this page.
The Company Secretary or the Deputy Secretary acts as
Secretary to the Nomination Committee. Other individuals
attend at the request of the Nomination Committee
Chairman when appropriate and during the year the Chief
Executive Officer and the Chief Financial Officer attended
meetings.
The Chairman of the Nomination Committee reports to the
Board on the outcome of Committee meetings and any
recommendations made by the Committee.
Role and activities of the Nomination Committee
The Nomination Committee assists the Board in
discharging its responsibilities relating to the structure, size
and composition of the Board. The Nomination Committee
is responsible for, amongst other matters, evaluating the
balance of skills, knowledge, independence, experience
and diversity of the Board, and makes recommendations
to the Board on such matters. The Nomination Committee
also considers succession planning, both for the Executive
and Non-Executive Directors, taking into account the skills
and expertise that will be needed on the Board in the
future.
70
Composition
Key:
NED
ED
INED
40%
0%
60%
Meeting attendance
Key:
Nomination Committee 100%
Meetings and attendance
Number of meetings during 2017
Lord Forsyth
Sir Henry Angest
Ann Berresford
Paul Marrow
Andrew Salmon
Nomination
Committee
3
3/3
3/3
3/3
3/3
3/3
NED: Non-Executive Director
ED:
INED:
Executive Director
Independent
Non-Executive Director
Strategic Report
Corporate Governance Report
Financial Statements
Board effectiveness and Non-Executive Director evaluation
During 2017 the Board conducted an internally facilitated
review of the effectiveness of the Board, its Committees and
individual Directors using a combination of questionnaires
and face to face meetings. The Committee reviewed the
results of the effectiveness reviews and the individual
Directors’ performance evaluations when assessing the
composition of the Board Committees and the contribution
made by the individual Directors. The Committee noted that
the conclusion to the Board effectiveness review was that the
Board was performing well and exercising the right level of
judgement with due regard to the duties placed on Directors
under company law.
As with all Boards that have undergone change, there were
areas for improvement. The effectiveness review highlighted
that there could be improvement in the quality of information
coming to the Board and its Committees; and that this would
assist the Board in moving towards an enhanced view on
forward looking strategic direction rather than backward
facing historic performance. The Committee noted that the
Directors had been mindful of the provisions of the Code and
their responsibilities as directors and, where applicable, as
senior managers under the Senior Managers Regime when
reaching their assessment of Board effectiveness and
individual Director contributions.
The Committee reviewed the independence of each Non-
Executive Director. Sir Henry Angest and Andrew Salmon
were appointed to the Board by Arbuthnot Banking Group
when Arbuthnot Banking Group owned the Group’s entire
issued share capital and remain Non-Executive Directors of
the Group. There is an understanding between the Group
and Arbuthnot Banking Group that for so long as
Arbuthnot Banking Group holds ten per cent., or more, of the
issued share capital of the Group, Arbuthnot Banking Group
would expect two directors of the Group to be nominees of
Arbuthnot Banking Group.
The Board, upon the recommendation of the Committee,
concluded that Sir Henry Angest and Andrew Salmon were
not independent within the meaning of the Code, having
regard to the relationship between the Company and
Arbuthnot Banking Group.
The Committee, following a rigorous review and evaluation,
considers Paul Marrow to be independent in both character
and judgement, and his judgement unaffected by his
appointments at other companies. The Board, upon the
recommendation of the Committee, is satisfied that Ann
Berresford, Paul Marrow and Victoria Stewart are all
independent Non-Executive Directors within the meaning
of the Code and that Lord Forsyth, on his appointment as
Chairman, met the independence criteria set out in the
Code. As a smaller company within the meaning of the Code,
the Company is required to have at least two independent
Non-Executive Directors.
The Committee recommended to the Board that
the composition of each Committee was appropriate,
with each Committee having the right balance of skills and
experience. Further information on the individual Directors’
experience can be found on pages 59 to 60. Following
the proposed changes to the Code announced by the FRC
in December 2017, the Committee has recommended to
the Board that Victoria Stewart join the Committee, which
the Board approved with effect from 28 February 2018.
The Committee contemplates conducting a further internally
facilitated review of the effectiveness of the Board,
its committees and individual Directors during 2018.
Board training and development
The Board receives detailed reports from executive
management on the performance of the Group at its
meetings. Updates are provided on relevant legal, corporate
governance and financial reporting developments.
In addition, the Board, upon the recommendation of the
Committee, adopted a training programme during 2017 and
received formal training from both internal and external
experts on topics ranging from Gender Pay Gap to Treasury
Management; and from IFRS 9 disclosures to directors’
duties. The focus for training in 2017 was on strategic matters
likely to impact the Group and on regulatory obligations
following the listing on the Main Market in October 2016.
Directors are also encouraged to attend external seminars on
areas of relevance to their role and to keep a record of their
external training.
A training plan for 2018 has been developed with a focus
both on strategic and governance matters.
Succession planning
The Nomination Committee has considered the Company’s
succession plans and focused on Board (executive and
non-executive) and Senior Manager succession.
Consideration has been given to potential internal
candidates, short term solutions in the event of unanticipated
changes in circumstances and external recruitment as well as
re-allocating responsibilities on a short term or longer basis.
The need for regulatory approval of the persons performing
Senior Manager functions under the Senior Managers
Regime has also been taken into account.
The Nomination Committee also reviewed the Board policy
on diversity, including gender. The policy is described on
page 64.
A full copy of the terms of reference for the Nomination
Committee can be obtained by request to the Company
Secretary or via the Group’s website at
www.securetrustbank.co.uk.
www.securetrustbank.co.uk
71
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Straightforward transparent banking
Statement by the Chairman
of the Audit Committee
I am pleased to present the report of the
Audit Committee for the financial year
ended 31 December 2017.
2017 has been an active year for the Audit Committee.
As well as routine ‘business as usual items’, the Committee
has exercised oversight of the external audit tender and
managed changes to the Committee composition and
responsibilities. In respect of the latter I would like to offer
my thanks to Paul Marrow who stepped down as Audit
Committee Chairman in September 2017 after serving
as Chairman since 2011. Paul remains an active member
of the Committee and our ‘Whistleblowers’ Champion’
and, as Chairman of the Risk Committee, he provides an
important link between the two Committees and helps
avoid duplication of oversight.
I would also like to thank Andrew Salmon for his contribution
to the Committee as he steps down from the Committee with
effect from 31 March 2018.
I was appointed to the Audit Committee in November 2016
and succeeded Paul Marrow as Chairman on 22 September
2017. During that period I received a tailored induction from
the Company Secretary and the Chairman of the Audit
Committee and since then have met regularly with key
members of the Finance team and the Chief Internal Auditor,
as well as the external audit partner.
In the Audit Committee report of the 2016 Annual Report
and Accounts we indicated that the Company would conduct
an external tender process coinciding with the required
rotation in audit partner at the end of the financial year 2017
audit. The tender was completed in late 2017 and, based
upon the Audit Committee’s recommendation, the Board is
proposing that shareholders approve that Deloitte LLP be
appointed as auditor effective from the 2018 Annual General
Meeting. We set out the details of the audit tender process
on page 76. KPMG LLP will continue in the role until
the audit of the Group’s consolidated accounts for the
year ending 31 December 2017 has been completed.
The Committee and the Board would like to thank each
audit firm that participated in the audit tender and
specifically KPMG LLP for their contribution and dedication
over the years. We look forward to a constructive and
professional relationship with Deloitte in the future.
The Committee has monitored closely the Group’s transition
to IFRS 9 and the accounting judgements involved, and
understanding the potential accounting treatment of IFRS 9
formed one of the key assessment criteria for potential
auditors in the audit tender. Further detail is set out on
page 117 and in Note 29 on pages 155 to 160.
2018 will be another busy year, as the Committee oversees
the implementation of IFRS 9 and addresses the transition to
that Standard and seeks to develop its relationship with the
external auditor, whilst overseeing the delivery of the Internal
Audit plan and the interim and Full Year accounts.
Further information on the activities of the Audit Committee
is provided in the following report and I will be available at
the AGM to answer any questions about our work.
Ann Berresford
Chairman of the Audit Committee
72
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Financial Statements
Audit Committee report
Audit Committee membership and meetings
The Audit Committee is composed of four members:
the Chairman of the Company (Lord Forsyth), who was
considered independent on appointment as Chairman, two
independent Non-Executive Directors (Ann Berresford and
Paul Marrow) and Andrew Salmon, who is a Non-Executive
Director. Andrew Salmon and Ann Berresford are considered
by the Board to have recent and relevant financial experience
and the Audit Committee as a whole has competence
relevant to the sector in which the Group operates.
The Code provides that for smaller companies, such as the
Company, the Board should establish an Audit Committee
of at least two independent Non-Executive Directors. In
addition, the Chairman of the Company may be a member
of, but not chair, the Committee if he/she was considered
independent on appointment as Chairman. The Company
complies with this provision.
The Audit Committee meets formally at least four times a
year and otherwise as required. The number of planned
meetings held during 2017 and the attending directors are
shown in the table at the bottom of this page.
The Company Secretary or the Deputy Company Secretary
acts as Secretary to the Audit Committee. Other individuals
attend at the request of the Audit Committee Chairman
and during the year the external auditor lead partner,
Chief Executive Officer, Chief Financial Officer and Chief
Internal Auditor and a number of senior members of the
finance department attended meetings to report to the
Audit Committee. The Chairman of the Audit Committee
reports to the Board on the outcome of Committee
meetings and any recommendations arising from the
Committee.
Role of the Audit Committee
The Audit Committee assists the Board in, amongst
other matters, discharging its responsibilities with regard to
regulatory reporting, financial reporting, including reviewing
the Company’s annual financial statements, reviewing and
monitoring the extent of the non-audit work undertaken
by external auditors, advising on the appointment,
reappointment, removal and independence of external
auditors and reviewing the effectiveness of the Company’s
internal audit activities, internal controls and risk
management systems. The ultimate responsibility for
reviewing and approving the annual report and accounts
and the half-yearly report remains with the Board.
The Board ensures the Annual Report, taken as a whole
is fair, balanced and understandable and provides the
information necessary for shareholders to assess the
Company’s position, performance, business model and
strategy. The Audit Committee assists the Board in reaching
those conclusions, including an assessment that the
narrative reporting in the front of the Annual Report
accurately reflects the financial statements in the back.
Composition
Key:
NED
ED
INED
25%
0%
75%
Meeting attendance
Key:
Audit Committee
100%
Audit Committee membership and meetings
Number of meetings during 2017
Ann Berresford
Lord Forsyth
Paul Marrow
Andrew Salmon
Audit
Committee
6
6/6
6/6
6/6
6/6
NED: Non-Executive Director
ED:
INED:
Executive Director
Independent
Non-Executive Director
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73
Secure Trust Bank PLC Annual Report & Accounts 2017
Straightforward transparent banking
Audit Committee report
continued
A full copy of the terms of reference for the Audit Committee
can be obtained by request to the Company Secretary or via
the Group’s website at www.securetrustbank.co.uk.
Matters discussed at Audit Committee meetings since
1 January 2017
The Audit Committee has a schedule of meetings with
standing agenda items. Meetings are planned to coincide
with key dates in the Group’s financial reporting cycle,
enabling the Committee to deal with matters on a timely
basis over the course of the year. In addition to standing
agenda items the Committee also deals with other matters
that arise during the year. In 2017 this included matters
relating to the external audit tender and the planned
transition to IFRS 9.
During the year the Audit Committee reviewed and
approved its Terms of Reference, the schedule of standing
agenda items, the Internal Audit Charter and the engagement
contract with the external auditors.
The principal matters considered by the Audit Committee
during the year and up to the date of this report are set out
below.
Financial reporting
The Audit Committee has reviewed the matters set out in
the table opposite in connection with the annual and interim
financial statements and considers that the Company has
adopted appropriate accounting policies and made
appropriate estimates and judgements.
The table opposite is not a complete list of matters
considered by the Committee but highlights the most
significant matters for the period in the opinion of the
Audit Committee.
External audit
The Committee has reviewed and approved the external
audit terms of engagement, the scope of the external audit,
timetable, materiality, strategy and fees. The Committee
maintains a close dialogue with the external auditors and
undertakes meetings with them without management when
considered appropriate and at least once a year.
The Audit Committee has also considered matters that might
impair the independence of the external auditor, including
the non-audit fees paid to the external auditor, and has
confirmed that it was satisfied as to the independence of
the external audit firm KPMG LLP.
The Audit Committee reviews written reports prepared by
the external auditors setting out their audit approach and
conclusions on matters of judgment impacting the financial
statements, disclosures in relation to non-recurring or
sensitive items and any internal control findings identified
during the course of the external audit.
74
During the year the Audit Committee assessed the
effectiveness of the work of the external auditors using a
questionnaire which considered matters such as the quality
of the team, the scope of the work, communications and
fees. The Committee also met with management, including
without KPMG LLP present, to hear their views on the
effectiveness of the external auditors. The Committee
concluded that the external auditors are performing well.
KPMG LLP has also confirmed to the Audit Committee that
it has policies and procedures in place to satisfy the required
standards of objectivity, independence and integrity and
that these comply with the Auditing Practices Board’s Ethical
Standards for Auditors. This ensures that the objectives of
the proposed engagement are not inconsistent with the
objectives of the audit; allows the identification and
assessment of any related threats to KPMG LLP’s objectivity;
and assesses the effectiveness of available safeguards to
eliminate such threats or reduce them to an acceptable level.
KPMG LLP does not carry out non-audit services where no
satisfactory safeguards exist.
During the year the Financial Reporting Council wrote to all
audit firms including KPMG LLP to highlight concerns about
the impact of findings from Audit Quality Reviews they had
carried out. KPMG LLP wrote to the Audit Committee setting
out their reflections on the matters raised by the Financial
Reporting Council, including procedures they intend to carry
out on a firm-wide basis to address the concerns raised.
The Committee has reviewed and discussed KPMG LLP’s
proposed responses with the external audit partner.
The Audit Committee was satisfied that the level of audit
fees payable in respect of the audit services provided,
being £338,000 (2016: £212,000) was appropriate and
that an effective audit could be conducted for such a fee.
The existing authority for the Audit Committee to determine
the current remuneration of the external auditors is derived
from shareholder approval granted at the AGM held in
May 2017.
Non audit services policy
The Group has agreed a policy on the provision of non-audit
services by its external auditor. The policy ensures that the
engagement of the external auditor for such services requires
pre-approval by appropriate levels of management and does
not impair the independence of the external auditor, and that
such engagements are reported to the Audit Committee on
a regular basis. The external auditor will only be selected for
such services when they are best suited to undertake the
work and there is no conflict of interest.
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Corporate Governance Report
Financial Statements
Financial reporting
Subject area
Matters considered
Accounting policies, key
judgements and assumptions
used in preparing interim and
annual financial statements
The Audit Committee reviewed the key accounting judgments made by management in preparing
the financial statements for the year ended 31 December 2017 (including comparatives for the
year ended 31 December 2016), the interim financial statements for the six months ended
30 June 2017, and the press releases and investor presentations that were prepared when the
financial statements were released.
In particular the Committee considered at its meeting in February 2018 a paper on the key
accounting judgments relating to the 2017 annual report and accounts. Among other matters
the Committee considered income recognition, impairments and expected value of share option
schemes. In relation to income recognition the treatment of fees and commissions was considered
together with the assessment of the appropriate expected lives for different products. This is
relevant to the calculation of the effective interest rate for each product. In relation to impairment
provisions the Committee considered the adequacy of provision cover, including the emergence
period for different products, factors relevant to the loss given default assumptions used for
consumer products and the level of overlay to the modelled impairment provision to reflect
increased uncertainty in the UK economy and the remaining sub-prime motor book.
In making its recommendations to the Board to approve the annual and interim financial
statements the Committee has taken into account matters raised by the external auditor on
matters of judgment and disclosures in relation to non-recurring or sensitive items.
Use of the going concern basis
in preparing the financial
statements and long term
viability of the STB Group
The financial statements are prepared on the basis that the Group and Company are each a
going concern. The Audit Committee has reviewed management’s explanations as to the
appropriateness of the going concern basis in preparing the Group and Company financial
statements.
The financial statements for 2017 also include statements that provide shareholders with the
Board’s views on the long term viability of the Group. The Audit Committee has reviewed and
challenged the basis for assessing long term viability, including the period by reference to which
viability is assessed, the principal risks to long term viability and actions taken or planned to
manage those risks.
Presentation of a ‘fair, balanced
and understandable’ Annual
Report and Accounts
The Audit Committee, having reviewed the content of the Annual Report and considering relevant
matters including the presentation of material sensitive items, the representation of significant
issues, the consistency of the narrative disclosures in the ‘front half’ with the financial statements,
the overall structure of the Annual Report and the steps taken to ensure the completeness and
accuracy of the matters included, has advised the Board that the 2017 Annual Report and Accounts
include a ‘fair, balanced and understandable’ assessment of the Group and Company’s businesses.
The potential impact of future
accounting changes
The Committee has considered changes to financial reporting requirements that were not yet
effective as at 31 December 2017 but that are likely to impact the reported results or financial
position of the Group in the future. One significant development is the implementation of
International Financial Reporting Standard 9 (Financial Instruments) which became effective in
2018 and for which the Company established an implementation project. The Committee has
reviewed progress in responding to the requirements of IFRS9 and has this matter as a standing
agenda item, considering matters such as: key decisions taken; credit loss modelling under the
new and existing standards; systems and controls requirements to embed IFRS9; and risks to the
successful completion of the project. Following the standard becoming effective, the Committee
has reviewed the expected impact of the transition on the 2018 opening balance sheet and the
associated treatment of the impact on capital resources. The Committee also approved the
accounting policies in respect of IFRS9.
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75
Secure Trust Bank PLC Annual Report & Accounts 2017
Straightforward transparent banking
Audit Committee report
continued
The provision of any non-audit services provided by the
external auditors requires prior approval, as set out in
the table at the bottom of this page.
The total of audit and non-audit fees paid to KPMG LLP
during the period is set out in Note 5 on page 129.
The non-audit services fee of £101,000 (2016: £536,000) was
in respect of, but not limited to, the review of the half-year
accounts and work relating to access to the Term Funding
Scheme. In the case of each engagement, management
considered it appropriate to engage KPMG LLP for the work
because of their existing knowledge and experience from
prior Group engagements. KPMG LLP were the reporting
accountants in connection with Admission and, as a
consequence, the non-audit fees for 2016 were substantial.
The Company confirms that it has complied with the
Statutory Audit Services for Large Companies Market
Investigation (Mandatory Use of Competitive Processes
and Audit Committee Responsibilities) Order 2014
(Article 7.1) published by the CMA on 26 September 2014
and Article 16 (3) of the Audit Regulation, including with
respect to the Audit Committee’s responsibilities for
agreeing the audit scope and fees and supervising the
audit tender process.
Internal audit
The Group has an independent Internal Audit function led by
the Chief Internal Auditor. The Chief Internal Auditor reports
directly to the chairman of the Audit Committee and they
meet each month.
The Committee is satisfied that these non-audit services did
not adversely impact the independence of KPMG LLP’s audit
services.
The Audit Committee has reviewed and approved the
internal audit plan for the year and has monitored the activity
of the Internal Audit function throughout the year. It has also:
External audit tender
KPMG LLP (and their predecessor firm) were appointed as
the Company’s auditor in 2009, requiring the audit to be
subject to an external tender process no later than 2019.
The current KPMG LLP audit partner is Andrew Walker who
has been the audit partner for four years and who can
therefore continue until the completion of the 2017 audit
at the latest. Although the Audit Committee has remained
satisfied with both KPMG LLP’s quality of service and
independence, as detailed above, the Audit Committee
recommended to the Board that it would be appropriate
to conduct an external tender process in anticipation of the
change in audit partner and commenced work on the tender
process in mid-2017.
The Audit Committee approved and oversaw the tender
process, including agreeing the timetable and tender
document, which were prepared in accordance with
the relevant requirements. A description of the process
undertaken during the audit tender is set out on
page 77.
The Audit Committee has reviewed plans for the transition
to the new auditors and will receive regular reports on the
transition at its meetings throughout 2018. KPMG LLP will
cease to hold office at the conclusion of the financial year
2017 audit. A statement of circumstances will be included
in the Notice of Annual General Meeting to be circulated
to shareholders.
• Reviewed other matters which are not currently
contemplated in the audit plan but which may be
appropriate for inclusion in the future.
• Considered the risk and control matters identified in
internal audit reports issued since the previous meeting
along with management’s responses to those points and
progress in taking action to resolve control weaknesses.
• Approved the Internal Audit budget and resource plan
for the year.
• Reviewed and approved the Internal Audit Charter.
• Reviewed the annual assessment of the overall
effectiveness of the governance and risk and control
framework provided by the Internal Audit function.
In addition the Audit Committee assesses the effectiveness
and independence of the Internal Audit Function each year.
In 2016 it commissioned an independent external party to
carry out a full external effectiveness review which highlighted
a number of particular strengths as well as some areas for
further enhancement. During 2017 the Committee has
reviewed the performance of the Internal Audit Function
taking into account an updated assessment carried out by
the Chief Internal Auditor and the progress made addressing
areas for enhancement identified in the 2016 review, and was
satisfied as to the effectiveness and independence of the
internal audit function.
Non audit services policy
Services not previously pre-approved regardless of fee
Any engagement > £100,000
Pre-approved services < £100,000
76
Approval required
Audit Committee
Audit Committee
CEO or CFO
Strategic Report
Corporate Governance Report
Financial Statements
The Committee was satisfied that Internal Audit has the
appropriate resources to deliver the 2017 and 2018 internal
audit plan. In addition to the internal resource it is also able
to draw on a panel of external subject matter experts.
During the year the Committee received a report on a review
and test of the Whistleblowing framework, which included
the results of mandatory training provided for staff and the
provision of a confidential hotline by an external third party.
Internal controls and risk management
The Audit Committee monitors the effectiveness of the
Group’s governance, risk and control framework. A statement
approved by the Committee regarding the operation of the
risk and control framework is set out on page 67.
During 2017 the Committee has reviewed the procedures
for detecting fraud affecting financial reporting.
Whistleblowing
The Audit Committee has reviewed the effectiveness of
whistleblowing arrangements in place within the Group and
adherence to the Financial Conduct Authority Rules on
Whistleblowing which became effective in September 2016.
The Chairman of the Risk Committee is the Whistleblowers’
Champion for the Group and the Risk Committee received
a report each quarter on the operation of the Whistleblowing
arrangements.
Audit Committee effectiveness
During the year the Committee considered and evaluated
its performance. It did this by means of a questionnaire
which members of the Committee completed and by taking
soundings from other attendees, including the external
auditor. The Chairman of the Committee then collected
the responses and produced a report to the Committee.
The result of the evaluation was that the Committee
considered that it was performing effectively.
Audit tender process
Key activities and timeline
Stage 1
The Audit Committee agreed and approved the draft plan submitted to the Committee, drafted by a Working Group of the then
Audit Committee Chairman, Chief Financial Officer, the Proposed Chairman of the Audit Committee, the Chief Internal Auditor and
the General Counsel and Company Secretary.
A stakeholder workshop was then held to confirm the scope and timetable for the tender, to determine the key selection criteria as
a basis for the evaluation scorecard and determine which firms would be invited to participate in the tender. These documents were
each agreed and approved by the Audit Committee prior to circulation to the participants.
Stage 2
Four firms, including one outside of the “Big Four”, were then invited by the Audit Committee Chairman to participate in this stage
of the tender, with each firm providing written confirmation in a prescribed format that they had no conflict of interest and that they
expected to satisfy independence requirements.
Once confirmation had been received from each firm, a timetable and process, including selection criteria and identification of
those individuals and roles the Committee expected to meet was sent to each firm. Written responses in respect of the tender
documentation were required.
Stage 3
Each written submission was evaluated using the scorecard determined in Stage 1, with a recommendation made from the Working
Group to the Audit Committee on which firms should be invited to present. Three firms were invited to give a presentation on their
proposals to the Audit Committee.
Stage 4
Each of the three firms gave a presentation, followed by a Question and Answer session, to the Audit Committee. The Audit
Committee ranked each firm based on both their written submission and their presentations.
Stage 5
The Audit Committee provided a written report to the Board, including a recommendation to the Board of two firms to be
appointed, specifying the Audit Committee’s first and second choices. The Board accepted the Audit Committee’s recommendation
to appoint Deloitte LLP as external auditor and a resolution for the appointment of Deloitte LLP will be put to shareholders at the
2018 AGM.
The Audit Committee and the Board confirm that this recommendation to shareholders is free from influence by a third party and
that no contractual term has been imposed on the Company limiting the choice of auditor.
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77
Secure Trust Bank PLC Annual Report & Accounts 2017
Straightforward transparent banking
Statement by the Chairman
of the Risk Committee
I am pleased to present the report of the
Risk Committee for the financial year ended
31 December 2017.
The Group has had separate Audit and Risk Committees
since 2011 and both Committees have overseen the
development and evolution of the risk management and
internal control frameworks during that period and to date.
The Risk and Compliance teams continue to meet the
challenge of developing regulation and have provided the
Committee with effective oversight of the risk landscape
within the Group.
Management of risk is a key part of what the Group does.
The Committee has been involved both with assessing the
principal risks that impact the Group at a macro-economic
and strategic level; and also in assessing risk at a business
level when the Group seeks to develop new business
opportunities or products. The Committee has worked
closely with the nascent residential mortgage team in
assessing and developing products which the mortgage
team are now bringing to market. We will continue to
monitor the emerging risks in this area as the business grows
the mortgage book and continues to develop new products.
Throughout the year the Committee has had a key focus on
data resilience and security, with special attention being paid
to ‘cyber security’ as the Group launched its new online
deposits platform. Cyber security has become a standing
agenda item for the Committee as the Group seeks to
mitigate the risk in this area, both by reviewing current
preventative measures and by scenario planning should a
cyber event occur. As well as receiving updates from the
Committee, the Board will participate in a specific cyber
security training session in 2018.
The Committee also considers regulatory updates through
regular reporting which includes the outputs of the
Compliance monitoring programme and emerging
regulatory requirements.
Further information on the activities of the Committee during
the year is provided in the following report and further
information about risk related matters can be found in the
sections of the report and accounts on pages 42 to 51.
Paul Marrow
Chairman of the Risk Committee
78
Risk Committee report
Risk Committee membership and meetings
The Risk Committee is composed of three members as
set out below. Paul Marrow is the Chairman of the Risk
Committee. There were no changes to the membership
of the Committee in 2017.
The Risk Committee has met formally five times during
the year and meets when required to address non-routine
matters. The number of planned meetings held during
2017 and the attending directors are shown in the
table at the base of this page:
The Company Secretary or the Deputy Company Secretary
acts as Secretary to the Risk Committee. Other individuals
attend at the request of the Risk Committee Chairman and
during the year the Chief Risk Officer, Chief Internal
Auditor, Chief Compliance Officer, Group Head of
Operational Risk, Chief Information Security Officer and
other senior managers attended meetings to report to the
Committee.
The Chairman of the Risk Committee reports to the Board
on the outcome of Committee meetings and any
recommendations arising from the Committee.
Role of the Risk Committee
The Risk Committee reviews the design and
implementation of risk management policies and risk
related strategies and the procedures for monitoring the
adequacy and effectiveness of this process; considers the
Group’s risk appetite in relation to the current and future
strategy of the Group; oversees the Group’s ICAAP and
ILAAP and outputs from these; and exercises oversight of
the risk exposures of the Group.
The Committee exercises its internal control and risk
management role through the reports it receives from the
ALCO, the Chief Risk Officer, the Chief Internal Auditor, the
Chief Executive Officer, the Chief Financial Officer and
other members of management and its engagement with
executive management, internal and external auditors and
consultants.
Other matters within the remit of the Committee are the
risk profile of the Group, risk appetite, frameworks and limits,
the risk management operating model, the technology
infrastructure supporting the risk management framework,
operational risk and regulatory and compliance matters.
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Corporate Governance Report
Financial Statements
Composition
Key:
NED
ED
INED
33.33%
33.33%
33.33%
Meeting attendance
Key:
Risk Committee
93.33%
Risk Committee membership and meetings
Number of meetings during 2017
Paul Marrow
Paul Lynam
Andrew Salmon
Risk
Committee
5
5/5
5/5
4¹/5
¹ Andrew Salmon was unable to attend the February meeting as he was overseas
and unable to dial in to the meeting.
NED: Non-Executive Director
ED:
INED:
Executive Director
Independent
Non-Executive Director
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Secure Trust Bank PLC Annual Report & Accounts 2017
Straightforward transparent banking
Risk Committee report
continued
Matters discussed at Risk Committee meetings since
1 January 2017
The Risk Committee has a schedule of meetings with
standing agenda items so that all relevant matters are dealt
with over the course of the year. In addition to standing
agenda items the Committee also deals with other matters
that arise during the year. In 2017 this included, for example,
increasing the focus on cyber security and matters relating to
the development of the mortgage business, the appointment
of a Group Data Protection Officer and updates on compliance
with the EU General Data Protection Regulation (GDPR).
During the year the Risk Committee reviewed its Terms of
Reference and approved the schedule of standing agenda
items, the Compliance monitoring plan for 2018, the
business continuity plan and the operational risk
management policy.
The principal matters discussed during the year and up to
the date of this report were as follows:
Matters discussed at Risk Committee meetings since 1 January 2017
Subject area
Matters considered
Group risk appetite statement
and key risk indicators
The Group’s key risk appetite metrics, which are reviewed and approved on an annual basis.
The Committee reviews exceptions to the last quarter’s performance on the key risk indicator
metrics in each meeting.
Strategic risks
Credit risk
Operational risk
Capital risk
Strategic risks (those arising from the internal environment and the external environment that
could have an effect on management’s ability to deliver on the Group strategic plan) are
discussed and challenged on an annual basis.
Credit risk performance for all businesses and ‘deep dive’ reviews on status and plans for
individual account balances or portfolios that warrant specific focus.
The Committee has a mandate to approve some Group-wide mandates and policies including
single counterparty limits and credit risk policies set for individual business areas.
Oversight of the operational risk policy including metrics and KPI reporting and business unit
management risk and control self-assessment. Complaints data, governance, including review of
the Group Governance Manual.
The Committee has primary responsibility for reviewing and making a recommendation to the
Board on the Bank’s ICAAP and ILAAP and the Resolution and Recovery Plans. Specific matters
such as the Pillar 2A capital requirement and the results of stress testing were reviewed and
debated.
Cyber resilience risk
The strategies undertaken within the Group to understand, identify, monitor and respond to
cyber threats including the current state and planned activity.
Regulatory and conduct risk
The Committee receives regular reports on the key risk indicators for regulatory, reputational
and conduct risk. The Committee reviews the regulatory risk assessment on an annual basis and
approves the annual compliance monitoring programme.
Whistleblowing
The Chair of the Committee has the role of Whistleblowers’ Champion. The Committee has
validated through oversight and regular reporting that the arrangements for whistleblowing
remain effective.
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Corporate Governance Report
Financial Statements
Compliance monitoring
The Committee oversees the management of regulatory risk
for the Group. The Chief Compliance Officer presents an
Annual Compliance Report to the Committee and responds
to any challenge from the Committee on the effectiveness of
the Compliance function.
The Committee receives bi-monthly reports on key risk
indicators for regulatory, reputational and conduct risk,
regulatory incidents and key advisory activity of note,
horizon scanning and actions to implement new and revised
regulations or legislation, and the outputs of the compliance
monitoring programme. The Committee reviews the
Regulatory Risk Assessment on an annual basis, and
approves the annual compliance monitoring programme.
In addition, the Committee receives a detailed review of
financial crime focussed on Anti-Money Laundering in the
Money Laundering Reporting Officer’s (MLRO) Annual
Report.
The Group has appointed an outsourced service provider to
manage its whistleblowing arrangements. Quarterly reports
are provided to the Committee and the Whistleblowers’
Champion and tests have been completed validating the
adequacy of the framework, service provider and internal
procedures.
Strategic and operational risk
The Committee oversees the management of strategic and
operational risk across the Group. The Group Head of
Operational Risk presents annually an Operational Risk
Management Policy to the Committee and responds to any
challenge from the Committee on the effectiveness of risk
management and risk governance throughout the Group.
To assist in understanding how the risk framework has
embedded within the Group and to challenge the
effectiveness of the risk management function, the
Committee receives a quarterly review of material
operational risk events/losses, together with the key findings
from bi-annual Risk and Control Self Assessments (RCSAs).
The Committee conducts an annual review of the Group
risk appetite statement and the supporting metrics and
recommends the Group risk appetite statement to the Board
for approval.
In assessing strategic risk the Committee has regard to
the identified strategic risks, which the Committee reviews
annually. In assessing strategic risks, the Committee has due
regard to the existing process and internal controls in
operation and reviews the recommendations from the Risk
and Compliance functions on how to adapt the controls
to mitigate those risks.
During 2017, regulatory changes have included the
implementation of Conduct Rules to notified Non-Executive
Directors and implementation of Regulatory References
Rules; planning for the extension of the Senior Managers
and Certification Regime to our regulated subsidiaries
(Debt Managers (Services) Ltd and V12 Retail Finance Ltd);
the major project for GDPR, which requires changes to the
management of personal data across the Group; and
implementation of Payment Services Directive II.
Credit risk
The Committee receives reports on key risk indicators for
credit risk, together with quarterly assessments of each
portfolio’s credit profile including impairments, bad debts,
watch-lists, and any policy exceptions. These assessments
are underpinned by the associated credit risk policies which,
together with the Responsible Lending policy, set out the
credit risk framework which is reviewed by the Committee
at least annually.
Conduct risk and culture remain a key focus within the Group
and are managed through the Customer Focus Committee
which reports to the Board through the Executive Committee.
Risk Committee effectiveness
During the year the Committee considered and evaluated
its own performance. It did this by means of a questionnaire
which members of the Committee completed. The Chairman
of the Committee then collected the responses and
produced a report to the Committee. The result of the
evaluation was that the Committee considered that it was
performing effectively.
A full copy of the terms of reference for the Risk Committee
can be obtained by request to the Company Secretary or
via the Group’s website at www.securetrustbank.co.uk.
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Straightforward transparent banking
Statement by the Chairman
of the Remuneration Committee
The Policy has provided a framework for the remuneration
of our Executive Directors and we have sought to replicate
and implement a similar remuneration framework across all
staff to ensure that remuneration across the Group is aligned
to our strategic goals. This continues to be work in progress
and will be a focus for the Committee throughout 2018.
The adoption of a remuneration framework, together with a
new grading structure, will also help in our identification of
the Gender Pay Gap (“GPG”) within STB and what we can
do constructively to address both the “gap” and our talent
pipeline.
We listened to shareholders’ concerns raised at the last
AGM about the quantum of executive remuneration and,
taking account of 2017 performance, have reflected this in
2017 reward outcomes and for the proposed remuneration
for 2018. Details of Executive Director remuneration in 2017
and 2018 can be found later in this report.
Our focus for 2018 will be in continuing to strengthen
the processes put in place during 2017, on reviewing the
implementation of the All Employee Remuneration Policy,
together with reviewing progress in GPG. Further disclosure
on diversity generally can be found on page 56.
The Committee will also be giving consideration to the
proposed changes to the remit of the Committee under
the revised UK Corporate Governance Code.
We encourage an active interest from our investors in our
Remuneration Policy and practices, and we welcome
dialogue with shareholders on remuneration and would
expect to engage regularly with shareholders on this
important subject.
Victoria Stewart
Chairman of the Remuneration Committee
I am pleased to present my first report as
Remuneration Committee Chairman at the
end of the first full year as a Company listed
on the Main Market of the London Stock
Exchange.
I succeeded Sir Henry Angest as Remuneration Committee
Chairman on 21 July 2017 and I would like to thank him for
his guidance and input as the Committee Chairmanship
transitioned to me, and also for his work earlier in the year
in drafting the Remuneration Policy, which was approved by
shareholders at the AGM on 3 May 2017. As detailed on
page 69 Sir Henry and Andrew Salmon will be stepping down
from the Committee with effect from 31 March 2018.
I would like to offer them both my thanks for their contribution
and counsel to the Committee throughout their tenure.
Our focus for the majority of 2017 has been on producing
and implementing the Remuneration Policy (“Policy”) and
the processes which underpin the Policy. The Committee
considers 2017 to be a transitional year in which the Company
made changes to practice and procedure resulting from the
move from AIM to the Main Market and in contemplation of
the implementation of the new Policy. The Committee will,
therefore, make a more detailed disclosure of the Executive
Directors’ performance metrics and target ranges for the
financial year ending 31 December 2018, and future years,
subject to any commercial sensitivity at the time of reporting.
The Committee intends to disclose the performance metrics
and targets for the financial year ending 31 December 2018,
subject to commercial sensitivity considerations, in the 2018
Annual Report.
Shareholders also approved three new share schemes at the
2017 AGM and we granted awards to the Executive Directors
and senior management under the 2017 Long Term Incentive
Plan for the first time on 1 June 2017. In August 2017 we
successfully launched our first Sharesave Scheme for eligible
staff which had a 41% take up. Both schemes are a powerful
retention tool creating alignment and encouragement for
staff to have greater engagement with STB. We intend to
grant shares under the Deferred Bonus Plan in Q2 2018,
following the payment and deferral of the 2017 Annual
Bonus to the Executive Directors.
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Corporate Governance Report
Financial Statements
Operation of the Remuneration Committee
Remuneration Committee membership and meetings
The Remuneration Committee is composed of five
members as set out below. Victoria Stewart was appointed
as the Chairman of the Remuneration Committee on
21 July 2017. There were no changes to the membership
of the Committee in 2017.
The Remuneration Committee meets at least twice a
year and when required to address non-routine matters.
The number of planned meetings held during 2017 and
the attending directors are shown in the table at the base
of the page:
The Company Secretary or the Deputy Company Secretary
acts as Secretary to the Remuneration Committee. Other
individuals attend at the request of the Remuneration
Committee Chairman and during the year the Chief
Executive Officer, HR Director and other senior managers
attended meetings to report to the Committee.
The Chairman of the Remuneration Committee reports to
the Board on the outcome of Committee meetings and any
recommendations arising from the Committee.
The UK Corporate Governance Code contemplates that,
in relation to the Company, the Board should establish a
Remuneration Committee of at least two independent
Non-Executive Directors. The Company Chairman may also
be a member of the Committee where, as is the case with
STB, he was considered independent on appointment
as Chairman. All the members of the Committee are
Non-Executive Directors and Paul Marrow and Victoria
Stewart are independent Non-Executive Directors, in
compliance with the Code provision in relation to the
composition of the Remuneration Committee.
During the year the Committee reviewed and approved its
terms of reference. A full copy of the terms of reference of
the Remuneration Committee can be obtained by request
to the Company Secretary or via the Group’s website at
www.securetrustbank.co.uk.
Composition
Key:
NED
ED
INED
40%
0%
60%
Meeting attendance
Key:
Remuneration
Committee
100%
Remuneration Committee membership and meetings
Number of meetings during 2017
Victoria Stewart
Lord Forsyth
Sir Henry Angest
Paul Marrow
Andrew Salmon
Remuneration
Committee
5
5/5
5/5
5/5
5/5
5/5
NED: Non-Executive Director
ED:
INED:
Executive Director
Independent
Non-Executive Director
www.securetrustbank.co.uk
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Secure Trust Bank PLC Annual Report & Accounts 2017
Straightforward transparent banking
Operation of the
Remuneration Committee
continued
Role of the Remuneration Committee
The Remuneration Committee assists the Board in fulfilling
its responsibilities in relation to remuneration including,
amongst other matters, determining the individual
remuneration and benefits package of each of the Executive
Directors and recommending and monitoring the
remuneration of senior management below Board level.
The table below is not a complete list of matters considered
by the Committee but highlights the most significant matters
for the period in the opinion of the Remuneration
Committee.
Key Matters considered by the Committee from 1 January 2017 to the date of this report.
Item
Comment
Directors Remuneration Report
(“DRR”) and other disclosures in
the Annual Report & Accounts.
The Committee considered the disclosures required in the Annual Report & Accounts for the first
time as a company listed on the Main Market. The Committee received advice from the Company
Secretary, HR Director and Deloitte LLP when compiling the DRR and the additional disclosures in
the Notes.
Remuneration Policy (“Policy”)
proposed at AGM
The Committee reviewed and approved for recommendation to the Board the Remuneration Policy,
having consulted with major shareholders and received advice on the Policy from Deloitte, the HR
Director and the Company Secretary. The Policy was proposed to shareholders at the AGM held on
3 May 2017 and was approved as set out on the Company website, www.securetrustbank.co.uk
Share Schemes presented at
AGM.
Executive Directors bonus
arrangements
In connection with the Policy, the Committee considered proposals regarding three share plans,
being a Long Term Incentive Plan, a Deferred Bonus Plan and an HMRC approved eligible
employee Save As You Earn (Sharesave) Plan. Further details on each plan and their operation can
be found in the Policy on the Company website.
The plans were presented to shareholders at the 2017 AGM and approved. The above plans were
then implemented in June and September 2017 as detailed later in this report.
The Remuneration Committee considered the bonus arrangements in relation to the Executive
Directors for 2016 under the arrangements that applied before the adoption of the Remuneration
Policy. These arrangements had operated on a discretionary basis but the Remuneration
Committee took into account the financial performance of the Group and personal performance in
a year of record profits, strong return on equity and operational and regulatory performance.
The Remuneration Committee considered the bonus arrangements in relation to the Executive
Directors for 2017 in accordance with the Remuneration Policy and the targets set as part of a
balanced business scorecard. In doing so the Remuneration Committee took into account the
financial performance of the Group and personal performance. Details of the 2017 bonus earned
by directors during the year can be found on pages 86 to 87.
Forward calendar and items
for 2018
The Committee agreed a standing agenda and calendar of meetings for 2018. Four meetings are
planned to be held in 2018 to address routine matters.
Annual review of terms of
reference
The Committee reviewed its terms of reference and approved these for recommendation to
the Board.
Proposed Grading Structure
for 2018
The Committee reviewed the new grading structure within the Group. The structure is backed by a
robust analytical job evaluation system, supported by industry based market benchmarking and is
intended to provide greater clarity and transparency for staff, allowing individuals to map how their
career could develop within the Group.
Gender Pay Gap Reporting
(“GPG”)
The Committee reviewed the GPG between staff and discussed disclosure of the figures and the
differences between Equal Pay and GPG.
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Corporate Governance Report
Financial Statements
Remuneration report
The information contained in the Directors
Remuneration Report is subject to audit,
where indicated in the Report, in accordance
with The Large and Medium-sized
Companies and Groups (Accounts and
Reports) Regulations 2008 (as amended).
On behalf of the Board, as Chairman of the Remuneration
Committee, I am pleased to present our Directors’
Remuneration Report.
The Directors’ Remuneration Report contains the Annual
Remuneration Report which explains the operation of
remuneration related arrangements for 2017 and a summary
of the intended operation of the Remuneration Policy in
2018. An extract of the Remuneration Policy for Executive
and Non-Executive Directors and an illustration of the
application of the Remuneration Policy in 2018 are included
at the end of this Report for reference.
A full copy of the Remuneration Policy, which was
approved by shareholders at the 2017 Annual General
Meeting, can be found on the Company’s website at
www.securetrustbank.co.uk.
How we link executive remuneration to our strategy
The key principles behind the Group’s Remuneration
Policy are:
Performance and variable pay outcomes for the year
ended 31 December 2017
For the financial year ended 31 December 2017 Executive
Directors were eligible for an annual bonus award of up to
100% of salary, subject to stretching performance metrics
based on a balanced business scorecard of financial,
customer, operational and staff metrics. Up to 70% of the
bonus was subject to financial performance metrics and
30% of the bonus was subject to a mixture of customer,
operational and staff performance metrics.
The Board agreed the 2017 financial year budget at its
meeting in November 2016, which included targets relating
to the majority of the KPIs set out in the Strategic Report on
page 19. The performance objectives set for the Executive
Directors for the 2017 financial year reflected elements of
those KPIs. Additional strategic targets were set, specifically
relating to the non-financial performance metrics, for each
of the Executive Directors. Performance against those
objectives is set out on page 88.
With this in mind, and taking into account performance in
the year against the annual bonus performance metrics, the
CEO and CFO will receive 33% and 40% of their maximum
opportunities respectively. Further details are set out on
page 87.
There were no share based performance plans which vested
in respect of the financial year ended 31 December 2017.
• to be simple and transparent in order to reflect the Group’s
mission statement of straightforward, transparent banking,
Executive remuneration arrangements for 2018
Further detail on the intended operation of the Remuneration
Policy in 2018 is set out on page 92.
• to promote the long term success of the Group, with
transparent and demanding performance conditions,
In outline:
• to provide alignment between executive reward and the
Group’s values, risk appetite and shareholder returns, and
• It is proposed that the CEO will not receive a salary
increase in 2018.
• to have a competitive mix of base salary and short and
long term incentives, with an appropriate proportion of
the package linked to the delivery of sustainable long
term growth.
In developing and implementing the Remuneration Policy
we have also had regard to regulatory requirements and the
responsibilities of senior managers under the Senior Manager
Regime.
The Group is currently a level 3 firm within the classifications
applied by the regulators for regulated entities. That means
that the Group is not required to satisfy in full all elements of
the remuneration codes. Notwithstanding this, in formulating
and applying the Remuneration Policy the Committee has
had regard to the remuneration codes.
• It is proposed that the CFO’s salary will increase by 2.5%
to £410,000 in line with broader staff salary increases
across the Group.
• The maximum annual bonus opportunity for the year
ending 31 December 2018 will be equal to 100% of salary.
The bonus will be subject to stretching performance
metrics based on a balanced business scorecard of
financial, customer, operational and staff metrics. Up to an
additional 100% of salary may be awarded under the annual
bonus in exceptional circumstances (such as in order to
recognise exceptional performance during the year).
• 50% of any bonus earned will be deferred into shares
under the Deferred Bonus Plan. Deferred shares will vest
in equal tranches after one, two and three years following
deferral and will be subject to malus and clawback.
• Long term incentive arrangements up to 50% of salary are
expected to be awarded in 2018, which is below the
maximum limit of 100% of salary set out within our
approved Directors’ Remuneration Policy.
www.securetrustbank.co.uk
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Secure Trust Bank PLC Annual Report & Accounts 2017
Straightforward transparent banking
Directors Remuneration Report for 2017
Single figure table (audited information)
The following table sets out total remuneration earned for
each Director in respect of the year ended 31 December 2017
and the prior year.
Single figure table (audited information)
Salary and fees
Benefits
Annual bonus
2011 share
option scheme
Pension
Total remuneration
2017
£’000
2016
£’000
2017
£’000
2016
£’000
2017
£’000
2016
£’000
2017
£’000
2016
£’000
2017
£’000
2016
£’000
2017
£’000
2016
£’000
Executive
Directors
P Lynam
N Kapur
Non-Executive
Directors
M Forsyth1
H Angest1,2
A Berresford3
P Marrow
A Salmon2
V Stewart4
1,200
400
1,200
325
200
60
74
126
60
72
95
55
7
102
55
7
28
35
1
–
17
–
–
17
23
22
400 2,0005
4005
160
1
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2,192
1,846
66
46
560
2,400
0
0
–
–
–
–
–
–
0
2,2846
5716
35
25
35
25
1,663
620
5,542
1,343
–
–
–
–
2,2846
–
5,139
–
–
–
–
–
–
–
–
–
–
–
–
201
60
75
126
60
73
96
55
7
102
2,339
7
60
60
2,878
9,491
1 Lord Forsyth was appointed as Chairman of the Board on 19 October 2016 following the retirement of Sir Henry Angest as Chairman. Sir Henry Angest remains on the Board
as a Non-Executive Director.
² Fees for the services of Sir Henry Angest and Andrew Salmon as Non-Executive Directors are paid to Arbuthnot Banking Group by whom they are employed. Prior to the
step up to the Main Market total fees for both directors of £81,000 were paid in respect of these directors in 2016. Following the step up, fees of £5,000 per director per
month were paid. These figures exclude VAT. The aggregate amount of fees for both directors in 2016 was £111,000 excluding VAT.
³ Ann Berresford was appointed to the Board on 22 November 2016 and became Audit Committee Chairman on 23 September 2017.
4 Victoria Stewart was appointed to the Board on 22 November 2016 and became Remuneration Committee Chairman on 21 July 2017.
5 Paul Lynam and Neeraj Kapur earned a bonus equal to £400,000 (2016: £500,000) and £160,000 (2016: £200,000) respectively in respect of performance for the financial
year ended 31 December 2017. In 2016 Paul Lynam and Neeraj Kapur also earned a one-off bonus equal to £1,500,000 and £200,000 respectively following the sale of ELG.
Further information regarding the one-off bonuses is provided in the Directors’ Remuneration Report for 2016.
6 Further information regarding awards vesting under the 2011 share option scheme (a pre Main Market Admission long term incentive) is provided in the Directors’
Remuneration Report for 2016.
7 During 2017 Ann Berresford and Victoria Stewart became eligible to join and participated in the Company’s private medical insurance scheme.
The figures in the single figure table above are derived from the following:
Salary and fees
The amount of salary / fees received in the year.
Benefits
The taxable value of benefits received in the year. These are principally private medical health
insurance, car allowances and the value of Sharesave Scheme options granted during the year.
Sharesave Scheme options are valued based on the difference between the market value of the
shares at grant and the exercise price and were granted for the first time in 2017.
Annual bonus
The value of the bonus earned in respect of the financial year (including the proportion of the amount
earned which is subject to deferral).
2011 share option scheme
The intrinsic value (as at the date of vesting) of share options that vested during the financial year.
Pension
The amount of payments in lieu of Company pension contributions received in the year.
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Corporate Governance Report
Financial Statements
Additional disclosures in respect of the single figure table
(audited information)
Base salary and fees
Base salaries for the Executive Directors in respect of the
year ended 31 December 2016 and 31 December 2017 are
as follows:
50% of the bonus earned is deferred into shares under the
Deferred Bonus Plan. Deferred shares will vest in equal
tranches after one, two and three years following deferral.
The CFO’s objectives differ in weighting and target to those
of the CEO and, whilst no less challenging, had a different
outturn to that of the CEO.
P Lynam
N Kapur
2016
base salary
£000
2017
base salary
£000
1,200
325
1,200
400
The Committee considered it appropriate to increase
Neeraj Kapur’s base salary for 2017 to £400,000 to reflect his
contribution to the business, his experience in his current role
and the position of his salary compared to peers.
Bonus arrangements
For the financial year ended 31 December 2017 Executive
Directors were eligible for an annual bonus award of up to
100% of salary, subject to stretching performance metrics
based on a balanced business scorecard of financial,
customer, operational and staff metrics. Up to 70% of the
bonus was subject to financial performance metrics and 30%
of the bonus was subject to a mixture of customer,
operational and staff performance metrics. Details of the
annual bonus outturn are shown below.
Set out below are the high level financial and non-financial
performance metrics applied in respect of the financial year
ended 31 December 2017. The Directors’ Remuneration
Policy was implemented following its approval at the Annual
General Meeting in May 2017 and after the start of the
performance period. The Committee considers 2017 to be
a transitional year in which the Company made changes to
practice and procedure resulting from the move from AIM to
the Main Market and in the preparation and implementation
of the new Directors Remuneration Policy. The Committee
will make a more detailed disclosure of the Executive
Directors’ performance metrics and target ranges for the
financial year ending 31 December 2018, and future years,
subject to any commercial sensitivity at the time of reporting.
The Committee intends to disclose the performance metrics
and targets for the financial year ending 31 December 2018,
subject to commercial sensitivity considerations, in the 2018
Annual Report.
Bonus arrangements
Paul Lynam
Neeraj Kapur
www.securetrustbank.co.uk
Financial
% of salary
opportunity
Financial
% of salary
outturn
Non-financial
% of salary
opportunity
Non-financial
% of salary
outturn
Total
% of salary
outturn
70
70
12.3
14.3
30
30
21.1
25.7
33.4
40.0
£000
£400
£160
87
Secure Trust Bank PLC Annual Report & Accounts 2017
Straightforward transparent banking
Directors Remuneration Report for 2017
continued
Non-financial performance metrics
The high level objectives and targets (together with
commentary on their achievement) for both Executive
Directors are set out below. Targets that remain commercially
sensitive, or are ongoing, have not been disclosed. These
targets will be disclosed in the Directors Remuneration
Report for 2018 or at such time when the targets are no
longer considered commercially sensitive or, where the
target covers multiple years, the year of their completion.
Vesting of the non-financial performance element of the
annual bonus was based on the Committee’s view of the
relative importance and impact of each of the objectives
during the year.
Financial performance metrics
The financial performance metrics were based on the delivery
of Board agreed KPIs in accordance with the schedule below.
Targets that remain commercially sensitive, or are ongoing,
have not been disclosed.
Non-financial performance metrics
Objective
Grow
Targets
Achievement
Develop new systems,
processes and technology to
improve the operating
model.
Measured by reference to the launch of the new
deposit platform, the assessment of regulatory
capital and liquidity and developing the treasury
operations of the Group.
New deposit platform successfully
established in 2017, treasury
management function of the Group
enhanced.
Delivery of strategic
objectives throughout the
year.
Measured by reference to the completion of projects
during the 2017 financial year.
The majority of projects were delivered
with other projects either being delayed
into 2018 or carried forward.
Sustain
Maintain strong compliance
with risk appetite and legal
and regulatory obligations
across the Group.
Measured by reference to the Group’s risk appetite
and risk control framework and assessed, in part, by
the Risk Committee and by reference to staff
completion of regulatory training.
The Group’s risk appetite was
maintained within tolerance; mandatory
training had been completed by
relevant staff.
Love
Placing the customer at the
heart of what we do.
Measured by reference to the FEEFO and overall
customer rating for STB; and the retention of
customer service excellence award.
FEEFO scores for the period increased
and STB retained its customer service
award.
Being an employer of choice. Maintaining and improving on the employee
engagement scores; achieving the Investors In
People Gold rating.
The Group was awarded the Investors in
People Gold rating in 2017, employee
engagement scores remained above
average for the sector in 2017.
Financial performance metrics
Objective
Targets
Achievement
Grow
Underlying Profit Before Tax. Range of UPBT between 90% and 110% of an
agreed UPBT target.
Actual UPBT was £27.7M and this
objective was not achieved.
Sustain
Return on Average Equity.
Range of ROAE between 90% and 110% of an
agreed ROAE target.
Actual ROAE 9.1% and this objective met
the threshold.
Maintenance of Basel III
regulatory capital as
determined by the Board.
Range of capital required set at the minimum
capital requirement through to a level, which
included a capital buffer, as determined by the
Board.
Basel III regulatory capital as assessed by
the Board is above the agreed target as
detailed on page 20.
Love
Cost Income ratio as
determined by the Board.
Range of Cost Income ratio between 90% and
110% of an agreed target.
Actual Cost Income Ratio was 55.1% and
this objective was not achieved.
88
Strategic Report
Corporate Governance Report
Financial Statements
Vesting will be determined based on the Committee’s view of
the relative importance and impact of each of the objectives
over the performance period.
Awards are subject to a two year holding period following the
end of the performance period to the extent that the
performance metrics are achieved and awards vest.
Awards granted during the financial year
(audited information)
2017 Long Term Incentive Plan
Following shareholder approval of the Secure Trust Bank PLC
2017 Long Term Incentive Plan (LTIP) at the 2017 AGM,
nominal-cost share options were granted to Executive
Directors on 1 June 2017 in accordance with the rules of
the LTIP in the table below.
Vesting of the share options is subject to EPS, Relative TSR
and risk management performance metrics, assessed over a
three year performance period.
The EPS and relative TSR performance targets are set out in
the table below:
20% of the share options will be assessed on risk
management performance objectives aligned with the
Company’s risk management framework, including but not
limited to the number of customer complaints received
during the Performance Period; the number and nature of
material risk events within the Group during the Performance
Period; credit losses during the Performance Period
compared to the Board’s assessment of the Group’s risk
appetite; and management of regulatory capital limits during
the Performance Period.
Director
Date of grant
Basis of award
Number
of shares
Face value of
award £0001
Performance period
Paul Lynam
Neeraj Kapur
1 June 2017 52% of salary
1 June 2017 52% of salary
26,335
7,132
622.2
168.5
1 January 2017 to 31 December 2019
1 January 2017 to 31 December 2019
1 Based on a share price of 2,362.5p per share.
Vesting
(% of maximum)
0%
25%
100%
Straight-line vesting between points.
EPS growth
(40% of award)
Less than 10% per annum
10% per annum
30% per annum
Relative TSR1
(40% of award)
Below Median
Median
Upper quartile
1 As at the grant date, the TSR comparator group consisted of the following constituents: Aldermore Group, Arbuthnot Banking Group, Close Brothers, OneSavings Bank,
Metro Bank, Paragon Banking Group, Provident Financial, S&U, Shawbrook Group and Virgin Money.
www.securetrustbank.co.uk
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Secure Trust Bank PLC Annual Report & Accounts 2017
Straightforward transparent banking
Directors Remuneration Report for 2017
continued
Statement of Directors’ shareholding and share interests
(audited information)
No formal shareholding guidelines are currently in place.
However, Paul Lynam has committed to building up and
maintaining a shareholding of at least 100% of base salary,
over time, by retaining all awards under the LTIP that vest
(net of income tax and National Insurance).
The interests of the Directors and their connected persons in
the Company’s ordinary shares as at 31 December 2017 were
as set out below. There have been no changes to those
interests between 31 December 2017 and the date of signing
of these financial statements.
Payments made to former Directors during the year
(audited information)
No payments were made in the year to any former Director
of the Company.
Payments for loss of office made during the year (audited
information)
No payments for loss of office were made in the year to any
Director of the Company.
Directors’ shareholding and share interests
Performance graph and historical CEO remuneration
outcomes
The graph on the following page shows the total shareholder
return (“TSR”) performance for the Company’s shares in
comparison to the FTSE SmallCap Index (excluding
Investment Trusts) for the period from 1 January 2012 to
31 December 2017. For the purposes of the graph, TSR has
been calculated as the percentage change during the period
in the market price of the shares, assuming that dividends are
reinvested. The graph shows the value, by 31 December 2017,
of £100 invested in the Group over the period compared with
£100 invested in the FTSE SmallCap Index (excluding
Investment Trusts). The FTSE SmallCap Index (excluding
Investment Trusts) has been chosen as a comparator as this is
the most appropriate reference point given the capitalisation
of the Company.
The table on the following page shows details of the
total remuneration, bonus and share options vesting
(as a percentage of the maximum opportunity) for the
CEO over the last six financial years.
Director
Type
Owned outright
P Lynam
Shares
15,000
2011 Share Options
2017 LTIP
2017 SAYE
Phantom share options1
–
–
–
–
N Kapur
Shares
1,000
2011 Share Options
2017 LTIP
2017 SAYE
Phantom share options1
M Forsyth
H Angest
Shares
Shares
A Berresford Shares
P Marrow
A Salmon
V Stewart
Shares
Shares
Shares
–
–
–
–
2,000
–
–
5,440
7,500
–
Vested but
unexercised
–
141,667
–
–
–
–
35,417
–
–
–
–
–
–
–
–
–
Vested and
exercised
during the
year
Unvested, not
subject to
performance
conditions
Unvested,
subject to
performance
conditions
Total as at
31 December
2017
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1,364
–
–
–
–
1,364
–
–
–
–
–
–
–
–
–
26,335
–
187,500
–
–
7,132
–
31,250
–
–
–
–
–
–
15,000
141,667
26,335
1,364
187,500
371,866
1,000
35,417
7,132
1,364
31,250
76,163
2,000
–
–
5,440
7,500
–
1 Each Phantom Share Option was granted on 23 March 2015 and entitles the holder on exercise to a cash payment equal to the difference between the market value of a
share on the date of exercise and a notional exercise price of £25.00 per share. Each Phantom Share Option may be exercised on or after 3 November 2018 subject to the
satisfaction of a performance condition that, over the period from 23 March 2015 to 3 November 2018, the dividends paid by the Company have increased in percentage
terms when compared to the dividend of £12.3 million in respect of the financial year ended 31 December 2014 by at least the higher of the increase in RPI during that
period and 5% per annum.
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Strategic Report
Corporate Governance Report
Financial Statements
CEO pay increase in relation to all employees
The table below sets out the percentage change (from the
financial year ending 31 December 2016) in base salary, value
of taxable benefits and bonus for the CEO compared with
the average percentage change for all employees.
Paul Lynam earned a bonus equal to £400,000 in respect of
performance for the financial year ended 31 December 2017
(2016: £500,000).
Spend on pay
The table at the foot of this page sets out the percentage
change (from the financial year ending 31 December 2016)
in dividends and the overall expenditure on pay (as a whole
across the organisation).
Total remuneration and share options
2017
2016
2015
2014
2013
2012
Total Shareholder Return (‘TSR’) vs FTSE SmallCap Index
ꢀ00
ꢁ00
ꢂ00
200
100
ꢃan 12
ꢃan 1ꢂ
ꢃan 1ꢁ
ꢃan 1ꢀ
ꢃan 1ꢅ
ꢃan 17
ꢃan 1ꢄ
Secure Trust
FTSE SmallCap (excluding Investment Trusts)
Total
remuneration
£’000’s
Bonus as
a % of maximum
opportunity1
Share options as
a % of maximum
opportunity2
1,657
5,542
1,459
3,671
1,031
870
33.3
N/A
N/A
N/A
N/A
N/A
N/A
100%
N/A
100%
N/A
N/A
1 Pre Main Market Admission bonuses have been determined by the Committee on a discretionary basis taking into account Group financial and individual performance during
the financial year.
2 No share options vested in respect of the years 2012, 2013, 2015 and 2017.
CEO pay increase in relation to all employees
Percentage change
Salary
Taxable benefits
Annual bonus
Spend on pay
Dividends, excluding special dividends, and share buybacks
Dividends, including special dividends, and share buybacks
Overall expenditure on pay continuing operations1
1 Further information can be found in Note 5 set out on page 129.
www.securetrustbank.co.uk
CEO Wider workforce
0%
0%
(20)%
2.4%
0%
0%
2017
£million
14
14
39.0
2016
£million
13.1
43.1
35.5
Change
%
6.9
(207.8)
9.9
91
Secure Trust Bank PLC Annual Report & Accounts 2017
Straightforward transparent banking
Directors Remuneration Report for 2017
continued
Service agreements and letters of appointment
Details of the Directors’ service agreements, letters of
appointment and notice periods are set out below:
Fees
The table at the base of this page sets out the Non-Executive
Director fee structure effective from 1 January 2018.
Implementation of Directors’ Remuneration Policy for the
financial year ending 31 December 2018
Details on how Secure Trust intends to implement the
Directors’ Remuneration Policy for the financial year ending
31 December 2018 is set out below.
Salary
Paul Lynam will not receive a salary increase in 2018.
Neeraj Kapur’s salary was increased by 2.5% to £410,000
with effect from 1 April 2018.
Service agreements and letters of appointment
Name
P Lynam
N Kapur
M Forsyth1
H Angest1
A Berresford
P Marrow1
A Salmon1
V Stewart
No fee increases are proposed for 2018.
Annual bonus
The proposed maximum annual bonus opportunity for the
year ending 31 December 2018 will be equal to 100% of
salary. The bonus will be subject to stretching performance
metrics based on a balanced business scorecard. Up to 70%
of the bonus will be subject to financial performance metrics
and a maximum of 30% of the bonus will be subject to a
mixture of customer, operational and staff performance
metrics. The Committee considers that the targets are
commercially sensitive. A description of the performance
metrics and targets will be disclosed in the Annual Report
on Remuneration for the year ending 31 December 2018
or at such time when the targets are no longer considered
commercially sensitive.
Commencement of current service
agreement/letter of appointment2,3
28 July 2010
27 October 2011
6 October 2016
6 October 2016
22 November 2016
6 October 2016
6 October 2016
22 November 2016
Notice period
12 months
12 months
6 months
6 months
6 months
6 months
6 months
6 months
1 Entered into new letters of appointment prior to the Company’s transition from the AIM to the Main Market.
2 Each of the Non-Executive Directors’ letter of appointment was amended in January 2018 by a side letter confirming their respective Committee membership and their total
fee. No other changes were made to their existing letter of appointment.
3 All Non-Executive Directors are subject to re-election at intervals of not more than three years.
4 Those directors retiring at the Annual General Meeting to be held on 16 May 2018 are listed on page 63.
5 Those Non-Executive Directors who are members of the Committee are set out on page 83.
Fees
Role
Chairman1
Non-Executive Director (basic fee)
Senior Independent Director
Chairman of Audit Committee
Chairman of Risk Committee
Chairman of Remuneration Committee
Member of Audit Committee
Member of Risk Committee
Member of Remuneration Committee
1 The Chairman does not receive any additional fees for his membership of any of the Board’s committees.
92
2018 fee
£’000’s
200
65
20
20
20
10
5
5
5
Strategic Report
Corporate Governance Report
Financial Statements
Up to an additional 100% of salary may be awarded in
exceptional circumstances (such as in order to recognise
exceptional performance during the year). To the extent that
any additional bonus is awarded, full details of the award and
rationale will be disclosed in the Annual Report on
Remuneration for the year ending 31 December 2018.
50% of any bonus earned will be deferred into shares under
the Deferred Bonus Plan. Deferred shares will vest in equal
tranches after one, two and three years following deferral.
LTIP
The Company proposes to grant LTIP awards to the Executive
Directors in the form of nominal share options at the level of
up to 50% of salary. The LTIP awards will be subject to EPS,
Relative TSR and risk management performance metrics as
in 2017. Performance will be assessed over a three year
performance period.
The proposed EPS and Relative TSR performance targets are
set out below.
20% of the award will be based on risk management
performance objectives aligned with the Company’s risk
management framework.
Remuneration Consultants and Committee advice
Management received advice form McLagen, part of the
Talent, Rewards & Performance practice at Aon plc, and from
Deloitte LLP during the year. McLagen was appointed by the
Group Head of HR. Deloitte was appointed by the Company
Secretary. Deloitte is a member of the Remuneration
Consultants’ Group, and as such chooses to operate pursuant
to a code of conduct that requires remuneration advice to
be given objectively and independently. The Committee is
satisfied that the advice provided by McLagen and Deloitte
in relation to remuneration matters is objective and
independent.
The advice received from Deloitte did not preclude Deloitte
from participating in the audit tender held during 2017.
Following the success of Deloitte in the audit tender,
arrangements are in place to monitor compliance with the
non-audit services policy of the Group and to ensure that the
remuneration related advice received from Deloitte in respect
of the 2017 Annual Report and Accounts does not adversely
affect their independence as auditor.
Statement of voting at AGM
The Remuneration Policy and Remuneration Report were
approved by shareholders at the AGM in 2017 and the votes
cast were as detailed in the table at the base of this page.
Approval
This Report was approved by the Board on 21 March 2018
and signed on its behalf by:
Victoria Stewart
Chairman of the Remuneration Committee
The proposed EPS and Relative TSR performance targets
Vesting
(% of maximum)
0%
25%
100%
Straight-line vesting between points.
EPS growth
(40% of award)
Less than 10% per annum
10% per annum
30% per annum
Relative TSR1
(40% of award)
Below Median
Median
Upper quartile
1 The Committee intends to use the following group of selected peers for assessing TSR performance: Arbuthnot Banking Group, Charter Court Financial Services Group plc,
Close Brothers, OneSavings Bank, Metro Bank, Paragon Banking Group, Provident Financial, S&U and Virgin Money.
Statement of voting at AGM
Resolution
Proxy votes for
% of proxy
votes cast
Proxy votes
against
% of proxy
votes cast
To receive and approve the directors’ remuneration report
To approve the directors’ remuneration policy
10,785,526
13,454,036
76.99
96.04
3,223,375
554,865
23.01
3.96
www.securetrustbank.co.uk
93
Secure Trust Bank PLC Annual Report & Accounts 2017
Straightforward transparent banking
Summary remuneration policy
The Directors’ Remuneration Policy was
approved by shareholders at the 2017
AGM and took effect from the end of that
meeting. A summary of the Directors’
Remuneration Policy is set out below.
A full copy of the Directors’ Remuneration
Policy can be found within the 2016 Report
and Accounts, which are on the website
at www.securetrustbank.co.uk, and that
document should be used when evaluating
Directors Remuneration.
Summary Directors’ Remuneration Policy table for Executive Directors
Operation
Base salary
Salaries are usually reviewed annually taking
into account:
• underlying Group performance;
• role, experience and individual
performance;
• competitive salary levels and market forces;
and
• pay and conditions elsewhere in the Group.
Benefits
Executive Directors receive benefits in line
with market practice, and these include a car
allowance, medical insurance, life assurance
and disability insurance.
Other benefits may be provided based on
individual circumstances. These may include,
for example, relocation and travel allowances.
Maximum opportunity
No maximum salary; increases will
normally be in line with the typical
range of salary increases awarded
(in percentage of salary terms) to
other employees in the Group.
Salary increases above this level
may be awarded to take account of
individual circumstances.
Whilst the Committee has not set
an absolute maximum on the level
of benefits Executive Directors may
receive, the value of benefits is set
at a level which the Committee
considers to be appropriately
positioned taking into account
relevant market levels based on the
nature and location of the role and
individual circumstances.
Pension
Executive Directors are eligible to participate
in the Group defined contribution pension
plan. In appropriate circumstances, such as
where contributions exceed the annual or
lifetime allowance, Executive Directors may be
permitted to take a cash supplement in lieu of
contributions to a pension plan.
Employer pension contributions are
limited to 5% of base salary.
The maximum cash supplement in
lieu of pension is 5% of base salary
(less any employer pension
contribution).
94
Strategic Report
Corporate Governance Report
Financial Statements
Operation
Annual bonus
Maximum opportunity
Performance metrics
Awards are based on performance (measured
over a year) against metrics determined by the
Committee.
Pay-out levels are determined by the
Committee after the year end based on
performance against those targets.
The normal maximum annual bonus
opportunity is 100% of base salary.
An additional annual bonus
opportunity of up to 100% of base
salary may be awarded in
exceptional circumstances.
Targets are set annually reflecting the Group’s
strategy and aligned with key financial,
strategic and/or individual targets.
The annual bonus will be assessed against key
financial performance metrics of the business
and non-financial strategic/personal
objectives, in such proportions as the
Committee considers appropriate.
Financial metrics
At least 50% of the maximum potential will
be paid for on-target performance and all of
the maximum potential will be paid for
maximum performance.
Non-financial strategic or individual metrics
Vesting of the non-financial strategic or
individual metrics will apply on a scale
between 0% and 100% based on the
Committee’s assessment of the extent to
which a non-financial performance metric has
been met.
Deferred share awards are not subject to any
additional performance metrics.
Performance metrics are selected that reflect
underlying business performance.
Performance metrics and their weighting
where there is more than one metric are
reviewed annually to maintain
appropriateness and relevance.
Awards will vest between 25% and 100%
for performance between ‘threshold’
performance (the minimum level of
performance that results in any level of
vesting) and ‘maximum’ performance.
The Committee has discretion to amend the
pay-out should any formulaic output not
reflect the Committee’s assessment of overall
business performance.
Executive Directors are required to defer 50%
of any bonus earned into shares under the
Deferred Bonus Plan (’DBP’). Deferred share
awards vest in equal tranches after one, two
and three years following deferral.
The Committee may decide to pay the whole
of the bonus earned in cash where the amount
to be deferred is less than £50,000. Clawback
provisions will apply to annual bonus awards
and malus and clawback provisions will apply
to deferred share awards.
Long Term Incentive Scheme (‘LTIP’)
Awards are in the form of nil-cost / nominal-
cost share options, conditional shares or other
such form as has the same economic effect.
Awards will be granted with vesting
dependent on the achievement of
performance conditions set by the
Committee, normally over at least a three year
performance period.
Awards will usually be subject to a two year
holding period following the end of the
performance period (with the exception that
sufficient awards may be sold to meet any
income tax and National Insurance liabilities).
The holding period does not apply to awards
with a face value of £150,000 or less at the
time of grant.
Awards may be settled in cash (or granted as a
right to a cash amount) at the election of the
Committee.
Malus and clawback provisions will apply to
awards.
All employee share schemes
Executive Directors are entitled to participate
in a HMRC tax-qualifying all-employee
Sharesave Scheme under the same terms as
other Group employees.
The normal maximum award is
100% of salary in respect of a
financial year.
The Committee will take into
account Company and personal
performance during the preceding
financial year when determining the
maximum award to be granted.
Participant limits are those set by
the UK tax authorities from time to
time.
N/A
www.securetrustbank.co.uk
95
Secure Trust Bank PLC Annual Report & Accounts 2017
Straightforward transparent banking
Summary remuneration policy
continued
Application of malus and clawback
Malus and clawback provisions will apply over the time
periods set out in the table below.
Malus may apply in the following circumstances:
• The Executive Director’s service agreement is terminated
for gross misconduct or the Executive Director receives a
formal written warning for gross misconduct, as defined
by the Company’s disciplinary policy.
• The Company suffers a material loss arising from the
Executive Director operating outside of agreed risk policy
parameters and as such the Committee considers a
material failure in risk management has occurred.
• The level of the award is not considered sustainable when
assessing the overall financial viability of the Company.
• The Executive Director is subject to regulatory censure
in respect of a material failure in control.
Clawback may apply in the following circumstances:
• Discovery of a material misstatement resulting in an
adjustment in the audited consolidated accounts of
the Company.
• The assessment of any performance target or condition
in respect of an award was based on material error or
materially inaccurate or misleading information.
• The discovery that any information used to determine the
DBP and/or LTIP was based on material error, or materially
inaccurate or misleading information.
• Action or conduct of an Executive Director which, in the
reasonable opinion of the Board, amounts to fraud or
gross misconduct.
• The Executive Director is subject to regulatory censure
in respect of a material failure in control.
Application of malus and clawback
Element
Malus
Clawback
Annual bonus award
To such time as payment is made. Up to three years following payment.
Deferred bonus award To such time as the award vests.
Tranche of award deferred for one year: Up to two years following vesting.
Tranche of award deferred for two years: Up to one year following vesting.
Tranche of award deferred for three years: No clawback provisions apply.
LTIP award
To such time as the award vests.
Up to two years following vesting.
Non-Executive Directors
Element and purpose
Approach of the Company
Chairman and
Non-Executive
Director fees
To enable the Group
to recruit and retain
Non-Executive
Directors of a suitable
calibre.
Fees are normally reviewed annually.
Fees paid to Non-Executive Directors for their services are approved by the Board. Fees may include a basic
fee and, for Non-Executive Directors excluding the Chairman, additional fees for further responsibilities
(for example, chairmanship and membership of Board committees or holding the office of Senior Independent
Director). Fees are based on the level of fees paid to Non-Executive Directors serving on the board of
similar-sized UK listed companies and the time commitment and contribution expected for the role.
Non-Executive Directors cannot participate in any of the Company’s share schemes or annual bonus and are
not eligible to join the Company’s pension scheme.
Non-Executive Directors may be eligible to receive benefits such as private medical insurance, the use of
secretarial support, travel costs or other support that may be appropriate.
96
Strategic Report
Corporate Governance Report
Financial Statements
Illustrations of application of remuneration policy
The charts on this page set out for each Executive Director
an illustration of the application for 2018 of the remuneration
policy. The charts show the split of remuneration between
fixed pay, annual bonus (including amounts deferred under
the DBP) and LTIP on the basis of minimum remuneration,
remuneration receivable for performance in line with the
Company’s expectations and maximum remuneration (not
allowing for any share price appreciation).
In illustrating the potential reward, the following
assumptions have been made:
Paul Lynam
ꢂ000
ꢁꢀ00
ꢁ000
2ꢀ00
2000
1ꢀ00
1000
ꢀ00
0
ꢀꢃꢂꢁꢄꢅꢆ
1ꢂꢍ
27ꢍ
ꢀꢎꢍ
ꢀꢁꢂꢃꢄꢅꢆ
100ꢍ
ꢀꢅꢂꢇꢄꢅꢆ
ꢁꢁꢍ
ꢁꢁꢍ
ꢁꢂꢍ
ꢃꢄnꢄꢅuꢅ
perꢆorꢅance
ꢇarꢈet
perꢆorꢅance
ꢃaꢉꢄꢅuꢅ
perꢆorꢅance
Neeraj Kapur
1ꢀ00
1200
1000
ꢂ00
ꢁ00
ꢀ00
200
0
ꢀꢁꢂꢃꢄ
100ꢉ
ꢀꢅꢆꢇꢄ
1ꢀꢉ
2ꢁꢉ
ꢁ0ꢉ
ꢀꢈꢉꢊꢅꢃꢄ
ꢊ2ꢉ
ꢊ2ꢉ
ꢊꢁꢉ
ꢋꢅnꢅꢄuꢄ
perꢌorꢄance
ꢃarꢍet
perꢌorꢄance
ꢋaꢎꢅꢄuꢄ
perꢌorꢄance
Base salary, benefits
and pension
Annual Bonus
LTIP
Scenario
Description
Assumptions
Minimum performance
Minimum remuneration receivable.
Target performance
Remuneration receivable for achieving performance
in line with expectations.
Maximum performance
Remuneration receivable for achieving performance
in excess of the maximum performance targets.
Fixed elements of remuneration only – salary as
at 1 January 2018, benefits and pension.
No payments under incentive plans.
Fixed elements of remuneration (as above).
50% of maximum annual bonus earned.
25% of maximum LTIP award vesting.
Fixed elements of remuneration (as above).
100% of maximum annual bonus earned.
100% of maximum LTIP award vesting.
www.securetrustbank.co.uk
97
Secure Trust Bank PLC Annual Report & Accounts 2017
Straightforward transparent banking
Directors’ report
The directors submit their report, the related
Strategic Report and Corporate Governance
Report and the audited financial statements
of Secure Trust Bank PLC and its subsidiaries
(the ‘Group’) for the year ended
31 December 2017.
Report and financial statements
The Strategic Report is set out beginning on page 2.
This Directors’ Report also includes additional disclosures
required by the UKLA’s Disclosure and Transparency Rules
and Listing Rules. Some of the matters normally included in
the Directors’ Report are included by reference as indicated
below.
Principal activities and review
The principal activity of the Group is banking including
deposit taking and secured and unsecured lending.
The business review and information about future
developments, key performance indicators and principal
risks are contained in the Strategic Report.
Corporate governance
The Corporate Governance report contains information
about the Group’s corporate governance arrangements,
including the Group’s compliance with the UK Corporate
Governance Code (“Code”). A statement relating to the
Group’s compliance with the Code throughout the year
ending 31 December 2017 is set out on page 61.
Results
The results for the year are shown on page 110.
The Group made a profit for the period of £23.8 million
(2016: £137.5 million), being profit after tax from
continuing operations of £19.9 million (2016: £14.2 million)
and profit from discontinued operations of £3.9 million
(2016: £123.3 million). The reconciliation of statutory results
to underlying results is set out in the Financial Review in the
Strategic Report.
For the purposes of DTR 4.15R2 and DTR 4.1.8 this Directors’
Report and the Strategic Report on pages 2 to 56 comprise
the management report.
Dividends
The directors recommend the payment of a final dividend
of 61 pence per share which, together with the interim
dividend of 18 pence per share paid on 29 September 2017,
represents total dividends for the year of 79 pence per share
(2016: 75 pence per share). The final dividend, if approved by
members at the Annual General Meeting, will be paid on
25 May 2018 to shareholders on the register at the close of
business on 27 April 2018.
Dividend Policy
The Directors reviewed the dividend policy of the Company
and have adopted a progressive dividend policy which takes
into account the Company’s capital requirements, earnings
and cash flow in the long term.
The Directors will have regard to current and projected
capital, liquidity, earnings and market expectations in
determining the amount of the dividend. On occasion,
the Company may declare and pay a special dividend
resulting from special circumstances, however no such
special dividend is currently envisaged.
98
Strategic Report
Corporate Governance Report
Financial Statements
Share capital
The share capital of the Company comprises one class of
ordinary shares with a nominal value of 40p each. As at
31 December 2017 the Company had 18,475,229 ordinary
shares in issue. Each ordinary share entitles the holder to
one vote.
All the ordinary shares are fully paid and rank equally in all
respects and there are no special rights to dividends or in
relation to control of the Company. No shares were issued
during 2017 (2016: 283,335 shares issued).
Details of the Company’s share capital and movements in the
Company’s issued share capital during the year are provided
in Note 25 of the consolidated financial statements.
The Company operates a Long Term Incentive Plan,
Sharesave Plan and a Deferred Bonus Share Plan as set out
in the Remuneration Report on pages 85 to 93. Upon
exercise, shares awarded under these plans have the same
rights and rank pari passu with existing ordinary shares.
The powers of the Directors, including in relation to the issue
or buyback of the Company’s shares are set out in the
Companies Act 2006 and the Company’s Articles of
Association. Shareholders will be asked to grant authority to
the Directors to issue and allot shares at the 2018 Annual
General Meeting.
Under section 551 of the Companies Act 2006, the Directors
may allot equity securities only with the express authorisation
of shareholders which may be given in General Meeting, but
which cannot last more than five years. Under section 561 of
the Companies Act 2006, the Board may also not allot shares
for cash (otherwise than pursuant to an employee share
scheme) without first making an offer to existing shareholders
to allot such shares to them on the same or more favourable
terms in proportion to their respective shareholdings, unless
this requirement is waived by special resolution of the
shareholders.
Resolutions permitting such actions will be proposed at the
2018 Annual General Meeting. Details of the resolutions for
such authority are included in the Notice of the 2018 Annual
General Meeting and in the related explanatory notes.
Under section 701 of the Companies Act 2006 a company
may make a market purchase of its own shares if the purchase
has first been authorised by a resolution of the company.
The Company did not repurchase any of the issued ordinary
shares during the year or up to the date of this report,
although it was granted authority to do so by shareholders
at the 2017 Annual General Meeting on 3 May 2017.
That authority expires on 31 May 2018 or, if earlier, the
conclusion of the 2018 Annual General Meeting.
At the 2018 Annual General Meeting a special resolution
will be proposed authorising the Company to make market
purchases of ordinary shares within the limits set out in the
resolution. The resolution is in a similar form to that proposed
at the 2017 Annual General Meeting. The Directors have no
present intention of exercising the authority granted by the
resolution, but regard it as a useful tool to have available.
On a show of hands, each member has the right to one vote
at General Meetings of the Company. On a poll, each
member is entitled to one vote for every share held. The
shares carry no rights to fixed income. No person has any
special rights of control over the Company’s share capital
and all issued shares are fully paid.
There are no specific restrictions on the transfer of the shares
in the Company which are governed by the general
provisions of the Articles of Association and prevailing
legislation.
Substantial shareholders
In accordance with Disclosure and Transparency Rules
DTR5, the Company as at 19 March 2018 (being the latest
practicable date before publication of this report), has been
notified of the following disclosable interests in its issued
ordinary shares:
Significant shareholders
Invesco Perpetual Asset Management
Arbuthnot Banking Group PLC
Columbia Threadneedle Investments
Wellington Management Company
Mr Steven A Cohen
Ruffer
Unicorn Asset Management
BAE Systems Pension Fund Investment Management
www.securetrustbank.co.uk
No.of
Ordinary Shares
3,584,131
3,444,538
2,591,862
1,552,549
1,510,412
1,332,247
1,175,662
792,027
%
19.40%
18.64%
14.03%
8.40%
8.18%
7.21%
6.36%
4.29%
99
Secure Trust Bank PLC Annual Report & Accounts 2017
Straightforward transparent banking
Directors’ report
continued
Relationship with major shareholder
On the AIM IPO in 2011 the Company entered into a
Relationship Agreement with its majority shareholder,
Arbuthnot Banking Group PLC. Following the sell down
by Arbuthnot Banking Group in 2016 the Relationship
Agreement terminated. Nevertheless, the Company has an
understanding with Arbuthnot Banking Group that for so
long as Arbuthnot Banking Group holds 10% or more of the
issued share capital of the Company, Arbuthnot Banking
Group would expect two directors of the Company to be
nominees of Arbuthnot Banking Group.
Directors
A full list of Directors, including their biographical information
is shown on pages 59 to 60. All the Directors served on the
Board throughout the financial year and up to the date of
signing these financial statements. Those Directors retiring
and standing for re-election at the Annual General Meeting
to be held on 16 May 2018 are listed on page 63.
Directors’ interests
The Directors’ interests (and those of any persons connected
with them) in the share capital of the Company as at
31 December 2017 are set out on page 90 in the Directors
Remuneration Report.
Powers of Directors
The Directors’ powers are conferred on them by UK
legislation and by the Company’s Articles of Association.
Changes to the Company’s Articles of Association must be
approved by shareholders by way of a special resolution and
must comply with the provisions of the Companies Act 2006
and the Financial Conduct Authority’s Disclosure and
Transparency Rules.
Appointment and retirement of Directors
The appointment and retirement of the Directors is governed
by the Company’s Articles of Association, the UK Corporate
Governance Code and the Companies Act 2006. Further
details can be found on page 63 and in the explanatory notes
included in the Notice of 2018 Annual General Meeting.
Directors’ indemnities
The Company’s Articles of Association provide that, subject
to the provisions of the Companies Act 2006, the Company
may indemnify any director or former director of the
Company or any associated company against any liability and
may purchase and maintain for any director or former director
of the Company or any associated company insurance
against any liability.
Disclosure of information under Listing Rule 9.8.4R
Item
Details of any long term incentive schemes
The Group has maintained directors and officers liability
insurance throughout 2017.
The letters of appointment of the Non-Executive Directors
incorporate by reference the provisions of the Articles of
Association in relation to the indemnity of Directors into the
contract established by the letter of appointment between
the Non-Executive Director and the Company.
Disclosure of information under Listing Rule 9.8.4R
Additional information, where not already contained in the
Directors’ Report, where applicable to the Company can be
found in the sections of the Annual Report as set out in the
table at the base of this page.
Significant contracts
Details of related party transactions are set out in Note 35 to
the financial statements. There are no contracts of significance
in which a Director is interested.
There are no agreements between any Group company and
any of its employees or any Director of any Group company
which provide for compensation to be paid to an employee
or a Director for termination of employment or for loss of
office as a consequence of a takeover of the Company.
There are no significant agreements to which the Company is
party that take effect, alter or terminate upon a change of
control following a takeover bid for the Company.
Employment policies and equal opportunities
The Group is an inclusive and equal opportunities employer
and opposes all forms of discrimination. Applications from
people with disabilities will be considered fairly and if existing
employees become disabled, every effort is made to retain
them within the workforce wherever reasonable and
practicable. The Group also endeavours to provide equal
opportunities in the training, promotion and general career
development of disabled employees.
Group policies seek to create a workplace that has an open
atmosphere of trust, honesty and respect. Harassment or
discrimination of any kind is not tolerated. This principle
applies to all aspects of employment from recruitment and
promotion, through to termination and all other terms and
conditions of employment.
Page reference
page 89
Allotments of cash of equity securities otherwise than to shareholders in proportion to their holdings Note 26 and page 90
100
Strategic Report
Corporate Governance Report
Financial Statements
The Group has processes in place for communicating with its
employees. Employee communications include information
about the performance of the Group, on major matters
affecting their work, employment or workplace and to
encourage employees to get involved in social or community
events. These communications aim to achieve a common
awareness for all employees of the financial and economic
factors affecting the performance of the Group. Further
information on the ways in which the Group communicates
with its employees are set out in the Corporate Responsibility
Report starting on page 53.
Research and development
The Group does not undertake research and development
activities.
Political donations and expenditure
The Group made no political donations and incurred no
political expenditure during the year (2016: £nil).
Post balance sheet events
There have been no significant events between 31 December
2017 and the date of approval of the financial statements
which would require a change to or additional disclosure in
the financial statements.
Disclosure of information to auditor
Each Director in office at the date of this Directors’ Report
confirms that so far as the Director is aware, there is no
relevant audit information of which the Company’s auditor is
unaware and each Director has taken all the steps that they
ought to have taken as a Director to make themselves aware
of any relevant audit information and to establish that the
Company’s auditor is aware of that information.
This confirmation is given and should be interpreted in
accordance with the provisions of the Companies Act 2006.
Going concern
The financial statements have been prepared on a going
concern basis. Further information about this is to be found
on page 52.
Fair, balanced and understandable
The Directors are satisfied that the Annual Report
and Accounts, taken as a whole, are fair, balanced and
understandable, and provide the information necessary
for members and other stakeholders to assess the Group’s
position and performance, strategy and business model.
Future developments and financial risk management
objectives and policies
Information about future developments, internal control and
financial risk management systems in relation to financial
reporting and financial risk management objectives and
policies in relation to the use of financial instruments can be
found in the following sections of the annual report which are
incorporated into this report by reference:
Future developments – see Strategic Report on pages 2 to 56.
Internal control and financial risk management systems in
relation to financial reporting – see Corporate Governance
Report on pages 57 to 109.
Financial risk management objectives and policies in relation
to the use of financial instruments – see Risk Management
Report on pages 42 to 51 and Note 28 to the financial
statements.
Greenhouse Gas emissions from our operations
The Group’s Greenhouse Gas emissions, required under the
Companies Act 2006 (Strategic Report and Directors’ Report)
Regulation 2013, are detailed on page 53.
Auditor
KPMG LLP was reappointed as auditor at the Annual General
Meeting held in 2017. As detailed on page 77 in the Audit
Committee Report, following a thorough and competitive
tender process the Board is recommending the appointment
of Deloitte LLP as auditor at the 2018 Annual General
Meeting.
Annual General Meeting
The 2018 Annual General Meeting will be held at 3pm on
16 May 2018 at Arbuthnot House, 7 Wilson Street, London,
EC2M 2SN.
By order of the Board
A J Karter
Secretary
21 March 2018
www.securetrustbank.co.uk
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Secure Trust Bank PLC Annual Report & Accounts 2017
Straightforward transparent banking
Directors’ responsibility statement
Under applicable law and regulations, the directors are also
responsible for preparing a Strategic Report, Directors’
Report, Directors’ Remuneration Report and Corporate
Governance Statement that complies with that law and those
regulations.
The directors are responsible for the maintenance and
integrity of the corporate and financial information included
on the Company’s website. Legislation in the UK governing
the preparation and dissemination of financial statements
may differ from legislation in other jurisdictions.
We confirm that to the best of our knowledge:
• The financial statements, prepared in accordance with
IFRS as adopted by the European Union, give a true and
fair view of the assets, liabilities, financial position and
profit or loss of the Company and the undertakings
included in the consolidation taken as a whole;
• The strategic report includes a fair review of the
development and performance of the business and the
position of the Company and the undertakings included
in the consolidation taken as a whole, together with a
description of the principal risks and uncertainties that
they face; and
• The Annual Report and financial statements, taken as a
whole, are fair, balanced and understandable and provide
the information necessary for shareholders to assess the
Company’s performance, business model and strategy.
This responsibility statement was approved by the Board of
directors on 21 March 2018 and is signed on their behalf by:
Paul Lynam
Chief Executive Officer
Neeraj Kapur
Chief Financial Officer
The directors are responsible for preparing the Annual Report
and the Group and parent company financial statements in
accordance with applicable law and regulations.
Company law requires the directors to prepare group and
parent company financial statements for each financial year.
As required by the Listing Rules they are required to prepare
the group financial statements in accordance with IFRS as
adopted by the EU and applicable law and have elected to
prepare the parent company financial statements on the
same basis.
Under company law the directors must not approve the
financial statements unless they are satisfied that they give a
true and fair view of the state of affairs of the Group and
parent Company and of their profit or loss for that period.
In preparing each of the Group and parent Company
financial statements, the directors are required to:
• select suitable accounting policies and then apply them
consistently;
• make judgements and estimates that are reasonable and
prudent;
• state whether they have been prepared in accordance
with IFRS as adopted by the EU; and
• assess the Group and parent Company’s ability to
continue as a going concern, disclosing, as applicable,
matters related to going concern; and
• use the going concern basis of accounting unless they
either intend to liquidate the Group or the parent
Company or to cease operations, or have no realistic
alternative but to do so.
The directors are responsible for keeping adequate
accounting records that are sufficient to show and explain the
parent Company’s transactions and disclose with reasonable
accuracy at any time the financial position of the parent
Company and enable them to ensure that its financial
statements comply with the Companies Act 2006. They are
responsible for such internal control as they determine is
necessary to enable the preparation of financial statements
that are free from material misstatement, whether due to
fraud or error, and have general responsibility for taking such
steps as are reasonably open to them to safeguard the assets
of the Group and to prevent and detect fraud and other
irregularities.
102
Strategic Report
Corporate Governance Report
Financial Statements
Independent Auditor’s report
to the members of Secure Trust Bank PLC
1. Our opinion is unmodified
We have audited the financial statements of
Secure Trust Bank (“the Company”) for the year ended
31 December 2017 which comprise the Consolidated
statement of comprehensive income, the Consolidated
and Company statement of financial position, the
Consolidated and Company statement of changes in
equity, the Consolidated and Company statement of
cash flows, and the related notes, including the
accounting policies in Note 1.
In our opinion:
• the financial statements give a true and fair view of the
state of the Group’s and of the parent Company’s affairs
as at 31 December 2017 and of the Group’s profit for
the year then ended;
• the Group financial statements have been properly
prepared in accordance with International Financial
Reporting Standards as adopted by the European
Union (IFRSs as adopted by the EU);
• the parent Company financial statements have been
properly prepared in accordance with IFRSs as adopted
by the EU and as applied in accordance with the
provisions of the Companies Act 2006; and
• the financial statements have been prepared in
accordance with the requirements of the Companies
Act 2006 and, as regards the Group financial
statements, Article 4 of the IAS Regulation.
Overview
Materiality:
Group financial statements as a whole
Coverage
Risks of material misstatement vs 2016
Recurring risks
Impairment of loans and receivables
Revenue Recognition
Basis for opinion
We conducted our audit in accordance with International
Standards on Auditing (UK) (“ISAs (UK)”) and applicable
law. Our responsibilities are described below. We believe
that the audit evidence we have obtained is a sufficient
and appropriate basis for our opinion. Our audit opinion
is consistent with our report to the audit committee.
We were appointed as auditor by the directors on
24 September 2009. The period of total uninterrupted
engagement is for the nine financial years ended
31 December 2017. We have fulfilled our ethical
responsibilities under, and we remain independent of
the Group in accordance with, UK ethical requirements
including the FRC Ethical Standard as applied to listed
public interest entities. No non-audit services prohibited
by that standard were provided.
2. Key audit matters: our assessment of risks of material
misstatement
Key audit matters are those matters that, in our
professional judgment, were of most significance in the
audit of the financial statements and include the most
significant assessed risks of material misstatement
(whether or not due to fraud) identified by us, including
those which had the greatest effect on: the overall
audit strategy; the allocation of resources in the audit;
and directing the efforts of the engagement team.
We summarise below the key audit matters (unchanged
from 2016), in decreasing order of audit significance
(and relating to both the Group and parent Company),
in arriving at our audit opinion above, together with our
key audit procedures to address those matters and,
as required for public interest entities, our results from
those procedures. These matters were addressed, and
our results are based on procedures undertaken, in the
context of, and solely for the purpose of, our audit of the
financial statements as a whole, and in forming our
opinion thereon, and consequently are incidental to that
opinion, and we do not provide a separate opinion on
these matters.
£1.2m (2016:£1.1m)
4% (2016: 4%) of Group profit before tax
100% (2016:100%) of Group profit before tax
www.securetrustbank.co.uk
103
Secure Trust Bank PLC Annual Report & Accounts 2017
Straightforward transparent banking
Independent Auditor’s report
continued
2. Key audit matters: our assessment of risks of material misstatement (continued)
1 Impairment of loans and receivables
1a - Collective and individual impairment provision on Consumer
Finance
Group and Bank impairment provision: £33.8 million
(2016: £22.7 million).
Group and Bank impairment charge: £33.9 million
(2016: £24.1 million).
Refer to page 73 (Audit Committee Report), page 117
(accounting policy) and page 124 (financial disclosures).
The risk
Subjective estimates
During the year the Group saw an increase in arrears and a decrease
in recoveries on the Consumer Finance portfolio which impacts the
impairment provision. The Group calculates an impairment
provision against its Consumer Finance portfolio using models that
are based on historical experience and management judgement.
An individual impairment provision is determined by stratifying
loans by arrears category and applying assumptions to determine
a loss given default (“LGD”) and propensity to default (“PD”).
Collective provisions are then calculated for the performing book to
capture incurred but not reported losses.
The Group calculates the probability of default based on historical
loss experience over an assumed outcome period. The use of
historical data has inherent limitations as it does not fully capture
all factors that impact incurred losses as at the reporting date.
Such factors can include changes in credit quality, the lengthening
of the period taken to reach default or macroeconomic conditions
which may have an adverse impact on loan losses. There is a risk
that the Group does not adequately provide for these inherent
limitations within its impairment model.
The Group applies judgement to estimate the amount of recoveries
made on loans that are in default. As such, there is a risk that the
Group’s estimate does not accurately predict actual future
recoveries across the whole portfolio in particular over repossessed
vehicles.
In the calculation of the collective provision, the Group applies
judgement to estimate the emergence period (the period of time
from an impairment trigger event such as loss of employment to the
loans being identified as impaired). There is a risk that the Group’s
estimate of the emergence period may not accurately reflect the
period of time between an impairment trigger and the observable
incurred loss event.
The most significant assumption for loan loss impairment provision
is in relation to loss given default.
Our response
Our procedures included:
• Control testing: We tested controls over the acceptance,
monitoring and reporting of credit risk;
• Our Sector Experience: We assessed the adequacy of the
assumptions made in respect of the emergence period with
reference to available benchmarking data for similar asset
classes at peer group organisations;
• Historical Comparisons: We assessed the appropriateness
of the Group’s key assumptions for probabilities of default
and recoveries with reference to actual historical experience.
We assessed the adequacy of the Group’s assumptions for
loss given default based upon the historical recoveries
achieved and the composition of the accounts that remain
within the portfolio at the reporting date;
• Expectation vs outcome: We applied alternative statistics
based provisioning methodologies, based on actual arrears
experience, to create an expectation of the impairment
provisions. We compared our result to the Group’s
impairment provision and assessed whether the assumptions
applied by the directors for emergence period and the length
of the period taken to reach default were appropriate;
• Tests of details: We applied sampling techniques to test the
levels of recoveries achieved on motor accounts and
compared to the directors’ own analysis; and
• Assessing transparency: We assessed the adequacy of the
Group’s disclosures in respect of the degree of estimation
involved in arriving at the balance.
Our results:
• We found the resulting estimate of the consumer loan
impairment provision to be acceptable (2016: acceptable).
Accounting application
The Group applies judgement in developing the methodology
applied to calculate impairment provisions. As this is inherently
subjective, there is a risk that the methodology applied is not in
line with the relevant accounting standards and industry practice.
Our procedures included:
• Methodology implementation: We tested the key
assumptions and logic applied within the impairment models
with reference to our interpretation of the relevant accounting
standards and our wider industry experience.
Our results
• The results of our procedures were satisfactory
(2016: satisfactory).
104
Strategic Report
Corporate Governance Report
Financial Statements
1 Impairment of loans and receivables (Continued)
The risk
Data capture and calculation error
The impairment models used by the Group are Excel based and
models are populated by extraction of large data sets. As a result,
there is an inherent risk that the data included in the impairment
models is not complete or accurate and that the formulae applied in
order to calculate the impairment provision are not accurate.
Our response
Our procedures included:
• Control observations: We tested controls over the lending
processes that capture certain static data used in the
impairment model (e.g. initial collateral valuation, loan
amounts and product interest rates) by observing the
operation of these controls over these processes;
• Data comparison: We checked both a sample of internal data
and the data totals used in the model back to the Bank’s
underlying source (e.g. current balance on the loan systems);
and
• Re-performance: We re-performed the provision calculations
to test the mathematical accuracy of the impairment models.
Our results
• The results of our procedures were satisfactory
(2016: satisfactory).
1b - Individual impairment provision on Real Estate Finance
Group and Bank impairment provision: £nil (2016: £nil).
Refer to page 73 (Audit Committee Report), page 117
(accounting policy) and page 125 (financial disclosures).
The risk
Omitted exposure
The Group assesses each Real Estate Finance loan for indications of
impairment in accordance with the relevant accounting standards.
The Real Estate Finance loan book requires the Group to make
significant judgements over the ability of counterparties to make
future loan repayments.
Whilst consideration is given to historical collections performance,
there is a risk that not all loans that require an individual impairment
provision will be identified.
As a result, the Group employs in-life monitoring procedures to
identify possible indicators of impairment.
Subjective estimates
The individual impairment on Real Estate Finance loans is
dependent on the quantum of future cash flows. The estimate of
this quantum is mostly sensitive to the valuation of the collateral that
may be sold to recover the loan balance in the event of default and
interest rates. Given the specialised nature of collateral assets, this
can be difficult to establish.
Our response
Our procedures included:
• Control design: We tested controls over the acceptance,
monitoring and reporting of credit risk. This included the key
controls over the completeness of individual provisioning
watchlists. We also assessed the effectiveness of the
governance and monitoring process in place for the
appropriate identification of higher risk loans and the
accuracy of risk grades allocated to counterparties; and
• Test of detail: We assessed the Group’s identification of
impairment triggers by inspecting a sample of loan files.
This included an inspection of performing accounts to assess
if there was any evidence of impairment; and an inspection
of accounts where an impairment trigger had been met.
Our results
• The results of our procedures were satisfactory
(2016: satisfactory).
Our procedures included:
• Control observations: We tested controls over the lending
processes that capture certain static data used in the
impairment model (e.g. initial collateral valuation, loan
amounts and product interest rates) by observing the
operation of these controls over these processes; and
• Comparing valuations: We used our independent Real Estate
Property Specialists to assess the value of realisable collateral
with reference to certain valuation reports.
Our results
• We found the resulting estimate of the Real Estate Finance
impairment provision to be acceptable (2016: acceptable).
www.securetrustbank.co.uk
105
Secure Trust Bank PLC Annual Report & Accounts 2017
Straightforward transparent banking
Independent Auditor’s report
continued
2. Key audit matters: our assessment of risks of material misstatement (continued)
2 Income Recognition on an EIR basis
Consolidated interest receivable and similar income £149.3 million
(2016: £141.1 million). Company interest receivable and similar
income £124.8 million; 2016: £122.0 million.
The risk
Subjective estimates
The Group uses bespoke models, which were refined during the
period, and increase the complexity of estimating interest income.
The models are in both Excel and specialised software, and enable
interest and fees earned and incurred on loans to be recognised
using the effective interest rate (‘EIR’) method which spreads directly
attributable expected cash flows over the behavioural life of a loan.
The behavioural life of a loan is the expected length of time
and profile customers follow to repay their loan balances.
This determines the quantum and timing of income recognition
in respect of a loan. The Group has a number of expected life
assumptions due to the variety of products that it offers.
The Group applies judgement in estimating the behavioural
life with reference to both historical experience and the Group’s
expertise and experience in the sector. As the Group applies
judgement to forecast behavioural lives there is a risk that the profile
used to recognise income is not reflective of recent performance. In
addition, as the forecast profiles extend into the future there is a
high level of estimation uncertainty.
Accounting application
The Group applies judgement in deciding which cash flows, such as
interest, fees and origination costs, are spread on an EIR basis and
which are recognised upfront. There is a risk that cash flows that
should be spread on an EIR basis are recognised upfront or vice
versa; and that the methodology for spreading cash flows on an
EIR basis is not in-line with the relevant accounting standards and
industry practice.
Data capture and calculation error
The models used by the Group are populated by extraction of large
data sets from a number of loan systems. As a result, there is an
inherent risk that the data included in the income recognition
models is not complete or accurate and that the formulae applied in
order to calculate the income amounts are not accurate.
Refer to page 73 (Audit Committee Report), page 117
(accounting policy) and page 126 (financial disclosures).
Our response
Our procedures included:
• Our sector experience: We assessed appropriateness of
the key assumptions behind the expected behavioural life
of the loan;
• Historical comparison: We assessed the reasonableness
of the models’ expected behavioural life against historical
experience of loan life;
• Our sector experience: We compared the profile of future
cash flows to our own expectations based on our knowledge
of the Group and experience of the industry in which it
operates; and
• Assessing transparency: We assessed the adequacy of the
Group’s disclosures in respect of the degree of estimation
involved in EIR accounting.
Our results
• We found the resulting estimate of the income recognised
to be acceptable (2016: acceptable).
Our procedures included:
• Methodology implementation: We tested the methodology
across the models for all material portfolios, with reference
to relevant accounting standards and our wider industry
experience; and
• Testing application: We inspected product literature to assess
whether the interest rate features, fees, subsidies and
origination costs were appropriately incorporated into the
Group’s income recognition models. As part of this
assessment we made reference to our interpretation of the
requirements of the relevant accounting standards and our
wider industry experience.
Our results:
• The results of our testing were satisfactory (2016: satisfactory).
Our procedures included:
• Control observation: We tested controls over the lending
processes that capture certain static data used in the EIR
model (such as loan balance and interest rate) by observing
the operation of the controls over these processes. We also
tested General IT controls over the loan systems;
• Data comparison: We checked that the models contained
a complete and accurate set of data inputs by agreeing a
sample of specified model inputs to source loan
documentation; and
• Re-performance: We re-performed EIR calculations, including
the calculation of behavioural lives, in order to test the
mathematical accuracy of the income recognition models.
Our results
• The results of our testing were satisfactory (2016: satisfactory).
106
Strategic Report
Corporate Governance Report
Financial Statements
3. Our application of materiality and an overview
of the scope of our audit
Materiality for the group financial statements as a
whole was set at £1.2m (2016: £1.1m), determined with
reference to a benchmark of group profit before tax of
which it represents 4% (2016: 4%).
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Materiality for the parent company financial statements
as a whole was set at £1.2m (2016: £1.1m), determined
with reference to a benchmark of profit before tax of
which it represents 3.9% (2016: 3.4%).
We agreed to report to the Audit Committee any
corrected or uncorrected identified misstatements
exceeding £0.06m, in addition to other identified
misstatements that warranted reporting on qualitative
grounds.
Scope –Group
The Group team performed the audit of the Group as
if it was a single aggregated set of financial information
and our audit was mainly performed at the Principal
Office in Solihull. The Group team visited 4 (2016: 4)
further satellite locations to further assess the audit risk
and strategy. The audit was performed using the
materiality level set out above. The audit was performed
using the materiality level set out above and covered
100% of total Group revenue, Group profit before tax,
and total Group assets.
Scope –disclosure of IFRS 9 effect
The Bank is adopting IFRS 9 Financial Instruments from
1 January 2018 and have included an estimate of the
financial impact of the change in accounting standard in
accordance with IAS 8 Changes in Accounting Estimates
and Errors as set out in Note 29. While further testing
of the financial impact will be performed as part of our
2018 year end audit, we have performed sufficient audit
procedures for the purposes of assessing the disclosures
made in accordance with IAS 8. We spent considerable
time assessing the key areas of judgement inherent in
the IFRS 9 transition which supports our assessment of
the appropriateness of the disclosure but also supports
our 2018 year end audit. Specifically we have:
• obtained an understanding of and evaluated
management’s process for the calculation of the IFRS 9
transition. We considered key management judgement
papers generated during the transitional process as
part of our assessment of the effectiveness of the
implementation;
• considered key Classification and Measurement
decisions, including Business Model Assessments
and Solely Payment of Principal and Interest (SPPI)
outcomes;
Group profit before tax
Group materiality
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• considered the reasonableness and appropriateness of
key assumptions and judgements in respect of the data
inputs to the model (leveraging, where appropriate,
from our IAS 39 work) as well as assessing the operation
of the model;
• compared the key assumptions and judgements with
those of comparable lenders;
• assessed the adequacy of the Bank’s transitional
disclosure.
4. We have nothing to report on going concern
We are required to report to you if:
• we have anything material to add or draw attention to
in relation to the directors’ statement in Note 1 to the
financial statements on the use of the going concern
basis of accounting with no material uncertainties that
may cast significant doubt over the Group and
Company’s use of that basis for a period of at least
twelve months from the date of approval of the
financial statements; or
• the related statement under the Listing Rules set out
on page 102 is materially inconsistent with our audit
knowledge.
We have nothing to report in these respects.
www.securetrustbank.co.uk
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Secure Trust Bank PLC Annual Report & Accounts 2017
Straightforward transparent banking
Independent Auditor’s report
continued
5. We have nothing to report on the other information
in the Annual Report
The directors are responsible for the other information
presented in the Annual Report together with the financial
statements. Our opinion on the financial statements does
not cover the other information and, accordingly, we do
not express an audit opinion or, except as explicitly stated
below, any form of assurance conclusion thereon.
Our responsibility is to read the other information and,
in doing so, consider whether, based on our financial
statements audit work, the information therein is materially
misstated or inconsistent with the financial statements or
our audit knowledge. Based solely on that work we have
not identified material misstatements in the other
information.
Strategic report and directors’ report
Based solely on our work on the other information:
• we have not identified material misstatements in the
strategic report and the directors’ report;
• in our opinion the information given in those reports
for the financial year is consistent with the financial
statements; and
• in our opinion those reports have been prepared in
accordance with the Companies Act 2006.
Directors’ remuneration report
In our opinion the part of the Directors’ Remuneration
Report to be audited has been properly prepared in
accordance with the Companies Act 2006.
Disclosures of principal risks and longer-term viability
Based on the knowledge we acquired during our financial
statements audit, we have nothing material to add or
draw attention to in relation to:
• the directors’ confirmation within the going concern
and business viability statement on page 52 that they
have carried out a robust assessment of the principal
risks facing the Group, including those that would
threaten its business model, future performance,
solvency and liquidity;
• the Principal Risks and Uncertainties disclosures
describing these risks and explaining how they are
being managed and mitigated; and
• the directors’ explanation in the going concern and
business viability statement of how they have assessed
the prospects of the Group, over what period they have
done so and why they considered that period to be
appropriate, and their statement as to whether they
have a reasonable expectation that the Group will be
able to continue in operation and meet its liabilities as
they fall due over the period of their assessment,
including any related disclosures drawing attention
to any necessary qualifications or assumptions.
108
Under the Listing Rules we are required to review the going
concern and business viability statement. We have nothing
to report in this respect.
Corporate governance disclosures
We are required to report to you if:
• we have identified material inconsistencies between
the knowledge we acquired during our financial
statements audit and the directors’ statement that they
consider that the annual report and financial statements
taken as a whole is fair, balanced and understandable
and provides the information necessary for shareholders
to assess the Group’s position and performance,
business model and strategy; or
• the section of the annual report describing the work of
the Audit Committee does not appropriately address
matters communicated by us to the Audit Committee.
We are required to report to you if the Corporate
Governance Statement does not properly disclose a
departure from the eleven provisions of the UK Corporate
Governance Code specified by the Listing Rules for our
review.
We have nothing to report in these respects.
6. We have nothing to report on the other matters on
which we are required to report by exception
Under the Companies Act 2006, we are required to
report to you if, in our opinion:
• adequate accounting records have not been kept
by the parent Company, or returns adequate for our
audit have not been received from branches not visited
by us; or
• the parent Company financial statements and the part
of the Directors’ Remuneration Report to be audited
are not in agreement with the accounting records and
returns; or
• certain disclosures of directors’ remuneration specified
by law are not made; or
• we have not received all the information and
explanations we require for our audit.
We have nothing to report in these respects.
Strategic Report
Corporate Governance Report
Financial Statements
7. Respective responsibilities
Directors’ responsibilities
As explained more fully in their statement set out
on page 102, the directors are responsible for: the
preparation of the financial statements including being
satisfied that they give a true and fair view; such internal
control as they determine is necessary to enable the
preparation of financial statements that are free from
material misstatement, whether due to fraud or error;
assessing the Group and parent Company’s ability to
continue as a going concern, disclosing, as applicable,
matters related to going concern; and using the going
concern basis of accounting unless they either intend to
liquidate the Group or the parent Company or to cease
operations, or have no realistic alternative but to do so.
Auditor’s responsibilities
Our objectives are to obtain reasonable assurance
about whether the financial statements as a whole are
free from material misstatement, whether due to fraud,
or other irregularities (see below), or error, and to issue
our opinion in an auditor’s report. Reasonable assurance
is a high level of assurance, but does not guarantee that
an audit conducted in accordance with ISAs (UK) will
always detect a material misstatement when it exists.
Misstatements can arise from fraud, other irregularities
or error and are considered material if, individually or
in aggregate, they could reasonably be expected to
influence the economic decisions of users taken on the
basis of the financial statements.
A fuller description of our responsibilities is
provided on the FRC’s website at www.frc.org.uk/
auditorsresponsibilities.
Irregularities – ability to detect
Our audit aimed to detect non-compliance with relevant
laws and regulations (irregularities) that could have a
material effect on the financial statements. We identified
relevant areas of laws and regulations from our sector
experience, through discussion with the directors and
other management (as required by auditing standards),
and from inspection of the Group’s regulatory and legal
correspondence.
We had regard to laws and regulations in areas that
directly affect the financial statements including financial
reporting (including related company legislation) and
taxation legislation. We considered the extent of
compliance with those laws and regulations as part of
our procedures on the related annual accounts items.
In addition we considered the impact of laws and
regulations in the specific areas of regulatory capital and
liquidity, conduct including money laundering, and
market abuse regulations recognising the financial and
regulated nature of the Group’s activities. With the
exception of any known or possible non-compliance, and
as required by auditing standards, our work in respect of
these was limited to enquiry of the directors and other
management and inspection of regulatory and legal
correspondence. We considered the effect of any known
or possible non-compliance with these, including PPI
mis-selling, as part of our procedures on the related annual
accounts items.
We communicated identified laws and regulations
throughout our team and remained alert to any
indications of non-compliance throughout the audit.
As with any audit, there remained a higher risk of non-
detection of irregularities, as these may involve collusion,
forgery, intentional omissions, misrepresentations, or the
override of internal controls.
8 The purpose of our audit work and to whom we owe
our responsibilities
This report is made solely to the Company’s members,
as a body, in accordance with Chapter 3 of Part 16 of the
Companies Act 2006. Our audit work has been undertaken
so that we might state to the Company’s members those
matters we are required to state to them in an auditor’s
report and for no other purpose. To the fullest extent
permitted by law, we do not accept or assume responsibility
to anyone other than the Company and the Company’s
members, as a body, for our audit work, for this report,
or for the opinions we have formed.
Andrew Walker
(Senior Statutory Auditor)
for and on behalf of KPMG LLP,
Statutory Auditor
Chartered Accountants
One Snowhill
Snow Hill Queensway
Birmingham
B4 6GH
21 March 2018
www.securetrustbank.co.uk
109
Secure Trust Bank PLC Annual Report & Accounts 2017
Straightforward transparent banking
Consolidated statement of comprehensive income
2017
Continuing
£million
2017
Discontinued
£million
2017
Total
£million
2016
Continuing
£million
2016
Discontinued
£million
2016
Total
£million
Note
Income statement
Interest receivable and similar income
Interest expense and similar charges
Net interest income
Fee and commission income
Fee and commission expense
Net fee and commission income
Operating income
Net impairment losses on loans and
advances to customers
Operating expenses
Profit on sale of equity instruments
available-for-sale
Profit before income tax
Income tax expense
Profit after income tax
Gain recognised on disposal after tax
Profit for the period
Other comprehensive income
Items that will not be reclassified
to the income statement
Revaluation reserve
Taxation
4
4
12
5
7
37
Items that may subsequently be reclassified
to the income statement
Available-for-sale reserve
Taxation
Other comprehensive income for the period,
net of income tax
Total comprehensive income for the period
Profit attributable to:
Equity holders of the Company
Total comprehensive income attributable to:
Equity holders of the Company
Earnings per share for profit attributable to
the equity holders of the Company during
the period (pence per share)
141.3
(26.7)
114.6
16.0
(1.1)
14.9
129.5
(33.5)
(71.3)
0.3
25.0
(5.1)
19.9
–
19.9
0.1
–
0.1
2.8
–
2.8
2.9
22.8
19.9
22.8
8.0
–
8.0
–
–
–
149.3
(26.7)
122.6
16.0
(1.1)
14.9
118.8
(26.3)
92.5
16.3
(1.8)
14.5
22.3
–
22.3
0.1
(0.1)
–
141.1
(26.3)
114.8
16.4
(1.9)
14.5
8.0
137.5
107.0
22.3
129.3
(3.4)
(0.3)
–
4.3
(0.8)
3.5
0.4
3.9
–
–
–
–
–
–
–
3.9
3.9
3.9
(36.9)
(71.6)
0.3
29.3
(5.9)
23.4
0.4
23.8
0.1
–
0.1
2.8
–
2.8
2.9
26.7
(23.3)
(64.3)
–
19.4
(5.2)
14.2
–
14.2
1.2
(0.2)
1.0
(2.8)
–
(2.8)
(1.8)
12.4
(7.0)
(7.2)
–
8.1
(1.6)
6.5
116.8
123.3
–
–
–
–
–
–
–
123.3
(30.3)
(71.5)
–
27.5
(6.8)
20.7
116.8
137.5
1.2
(0.2)
1.0
(2.8)
–
(2.8)
(1.8)
135.7
23.8
14.2
123.3
137.5
26.7
12.4
123.3
135.7
Basic earnings per share
Diluted earnings per share
8
8
107.7
106.4
21.1
20.9
128.8
127.3
77.9
77.3
676.2
754.1
671.4
748.7
The notes on pages 117 to 181 are an integral part of these consolidated financial statements.
110
Strategic Report
Corporate Governance Report
Financial Statements
Consolidated statement of financial position
ASSETS
Cash and balances at central banks
Loans and advances to banks
Loans and advances to customers
Debt securities held-to-maturity
Equity instruments available-for-sale
Property, plant and equipment
Intangible assets
Deferred tax assets
Other assets
Total assets
LIABILITIES AND EQUITY
Liabilities
Due to banks
Deposits from customers
Current tax liabilities
Deferred tax liabilities
Other liabilities
Provisions for liabilities and charges
Total liabilities
Equity attributable to owners of the parent
Share capital
Share premium
Revaluation reserve
Available-for-sale reserve
Retained earnings
Total equity
Total liabilities and equity
Note
At
31 December
2017
£million
At
31 December
2016
£million
9
10
13
14
15
16
18
19
20
21
18
22
23
25
14
226.1
34.3
1,598.3
5.0
–
11.5
10.4
0.6
5.4
1,891.6
113.0
1,483.2
3.0
–
41.9
1.4
1,642.5
7.4
81.2
1.3
–
159.2
249.1
112.0
18.2
1,321.0
20.0
13.5
11.4
9.0
–
4.9
1,510.0
70.0
1,151.8
1.7
0.2
49.0
1.3
1,274.0
7.4
81.2
1.2
(2.8)
149.0
236.0
1,891.6
1,510.0
The financial statements on pages 110 to 181 were approved by the Board of Directors on 21 March 2018 and were signed
on its behalf by:
Paul Lynam
Chief Executive Officer
Neeraj Kapur
Chief Financial Office
The notes on pages 117 to 181 are an integral part of these consolidated financial statements.
www.securetrustbank.co.uk
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Secure Trust Bank PLC Annual Report & Accounts 2017
Straightforward transparent banking
Company statement of financial position
ASSETS
Cash and balances at central banks
Loans and advances to banks
Loans and advances to customers
Debt securities held-to-maturity
Equity instruments available-for-sale
Property, plant and equipment
Intangible assets
Investments
Deferred tax assets
Other assets
Total assets
LIABILITIES AND EQUITY
Liabilities
Due to banks
Deposits from customers
Current tax liabilities
Other liabilities
Provisions for liabilities and charges
Total liabilities
Equity attributable to owners of the parent
Share capital
Share premium
Revaluation reserve
Available-for-sale reserve
Retained earnings
Total equity
Total liabilities and equity
At
31 December
2017
£million
At
31 December
2016
£million
Note
9
10
13
14
15
16
17
18
19
20
21
22
23
25
14
226.1
32.3
1,565.5
5.0
–
6.1
8.5
3.7
0.6
33.2
1,881.0
113.0
1,483.2
1.9
44.4
1.4
1,643.9
7.4
81.2
0.5
–
148.0
237.1
112.0
16.5
1,289.2
20.0
13.5
6.2
6.2
3.7
0.1
35.3
1,502.7
70.0
1,151.8
0.8
57.0
1.3
1,280.9
7.4
81.2
0.5
(2.8)
135.5
221.8
1,881.0
1,502.7
The Company has elected to take the exemption under section 408 of the Companies Act 2006 not to present the parent
company income statement. The profit for the parent company for the year is presented in the Company statement of
changes in equity.
The financial statements on pages 110 to 181 were approved by the Board of Directors on 21 March 2018 and were signed
on its behalf by:
Paul Lynam
Chief Executive Officer
Neeraj Kapur
Chief Financial Officer
Registered number: 00541132
The notes on pages 117 to 181 are an integral part of these consolidated financial statements.
112
Strategic Report
Corporate Governance Report
Financial Statements
Consolidated statement of changes in equity
Share
capital
£million
Share
premium
£million
Revaluation
reserve
£million
Available-for-
sale reserve
£million
Retained
earnings
£million
Total
£million
7.3
79.3
0.2
Balance at 1 January 2016
Total comprehensive income for the period
Profit for 2016
Other comprehensive income, net of income tax
Revaluation reserve
Available-for-sale reserve
Total other comprehensive income
Total comprehensive income for the period
Transactions with owners, recorded directly
in equity
Contributions by and distributions to owners
Issue of shares under a Share Option Scheme
Dividends
Charge for share based payments
Total contributions by and distributions to owners
Balance at 31 December 2016
Total comprehensive income for the period
Profit for 2017
Other comprehensive income, net of income tax
Revaluation reserve
Available-for-sale reserve
Total other comprehensive income
Total comprehensive income for the period
Transactions with owners, recorded directly
in equity
Contributions by and distributions to owners
Dividends
Tax on share based payments
Total contributions by and distributions to owners
–
–
–
–
–
0.1
–
–
0.1
7.4
–
–
–
–
–
–
–
–
–
–
–
–
–
1.9
–
–
1.9
–
1.0
–
1.0
1.0
–
–
–
–
–
–
–
–
–
–
–
–
–
0.1
–
0.1
0.1
–
–
–
–
–
–
(2.8)
(2.8)
(2.8)
54.4
141.2
137.5
137.5
–
–
–
1.0
(2.8)
(1.8)
137.5
135.7
–
–
–
–
–
(43.1)
0.2
(42.9)
2.0
(43.1)
0.2
(40.9)
–
23.8
23.8
–
2.8
2.8
2.8
–
–
–
–
–
–
–
0.1
2.8
2.9
23.8
26.7
(14.0)
0.4
(13.6)
(14.0)
0.4
(13.6)
159.2
249.1
81.2
1.2
(2.8)
149.0
236.0
Balance at 31 December 2017
7.4
81.2
1.3
The notes on pages 117 to 181 are an integral part of these consolidated financial statements.
www.securetrustbank.co.uk
113
Secure Trust Bank PLC Annual Report & Accounts 2017
Straightforward transparent banking
Company statement of changes in equity
Share
capital
£million
Share
premium
£million
Revaluation
reserve
£million
Available-for-
sale reserve
£million
Retained
earnings
£million
Total
£million
7.3
79.3
Balance at 1 January 2016
Total comprehensive income for the period
Profit for 2016
Other comprehensive income, net of income tax
Revaluation reserve
Available-for-sale reserve
Total other comprehensive income
Total comprehensive income for the period
Transactions with owners, recorded directly
in equity
Contributions by and distributions to owners
Issue of shares under a Share Option Scheme
Dividends
Charge for share based payments
Total contributions by and distributions to owners
Balance at 31 December 2016
Total comprehensive income for the period
Profit for 2017
Other comprehensive income, net of income tax
Available-for-sale reserve
Total other comprehensive income
Total comprehensive income for the period
Transactions with owners, recorded directly
in equity
Contributions by and distributions to owners
Dividends
Tax on share based payments
Total contributions by and distributions to owners
–
–
–
–
–
0.1
–
–
0.1
7.4
–
–
–
–
–
–
–
–
–
0.5
–
0.5
0.5
–
–
–
–
–
–
–
(2.8)
(2.8)
(2.8)
48.6
135.2
129.8
129.8
–
–
–
0.5
(2.8)
(2.3)
129.8
127.5
–
–
–
–
–
(43.1)
0.2
(42.9)
2.0
(43.1)
0.2
(40.9)
–
–
–
–
–
1.9
–
–
1.9
81.2
0.5
(2.8)
135.5
221.8
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
26.1
26.1
2.8
2.8
2.8
–
–
–
–
–
–
2.8
2.8
26.1
28.9
(14.0)
0.4
(13.6)
(14.0)
0.4
(13.6)
148.0
237.1
Balance at 31 December 2017
7.4
81.2
0.5
The notes on pages 117 to 181 are an integral part of these consolidated financial statements.
114
Consolidated statement of cash flows
Cash flows from operating activities – Continuing operations
Profit for the year
Adjustments for:
Income tax expense
Depreciation of property, plant and equipment
Loss on sale of property, plant and equipment
Amortisation of intangible assets
Impairment losses on loans and advances to customers
Share based compensation
Profit on sale of equity instruments available-for-sale
Cash flows from operating profits before changes in operating assets
and liabilities
Changes in operating assets and liabilities:
– net decrease/(increase) in debt securities held-to-maturity
– net increase in loans and advances to customers
– net (increase)/decrease in other assets
– net increase in amounts due to banks
– net increase in deposits from customers
– net (decrease)/increase in other liabilities
Income tax paid
Proceeds from sale of equity instruments available-for-sale
Net cash inflow/(outflow) from operating activities – Continuing operations
Cash flows from investing activities
Sale of subsidiary undertakings
Sale of discontinued operation
Purchase of property, plant and equipment
Purchase of computer software and other intangible assets
Net cash inflow from investing activities – Continuing operations
Cash flows from financing activities
Shares issued
Dividends paid
Net cash outflow from financing activities – Continuing operations
Net increase/(decrease) in cash and cash equivalents – Continuing operations
Net increase in cash and cash equivalents – Discontinued operations
Cash and cash equivalents at 1 January
Cash and cash equivalents at 31 December
Note
7
15
16
37
37
15
16
37
27
Strategic Report
Corporate Governance Report
Financial Statements
Year ended
31 December
2017
£million
Year ended
31 December
2016
£million
19.9
5.1
0.8
–
2.0
33.5
–
(0.3)
61.0
15.0
(378.3)
(1.0)
43.0
331.4
(7.0)
(5.1)
16.6
75.6
–
37.1
(0.8)
(3.4)
32.9
–
(14.0)
(14.0)
94.5
35.7
130.2
260.4
14.2
5.2
0.6
0.2
1.6
23.3
0.2
–
45.3
(16.2)
(396.9)
2.2
35.0
118.7
22.9
(6.3)
–
(195.3)
209.9
–
(2.5)
(3.6)
203.8
2.0
(43.1)
(41.1)
(32.6)
19.5
143.3
130.2
The notes on pages 117 to 181 are an integral part of these consolidated financial statements.
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Secure Trust Bank PLC Annual Report & Accounts 2017
Straightforward transparent banking
Company statement of cash flows
Cash flows from operating activities – Continuing operations
Profit for the year
Adjustments for:
Income tax expense
Depreciation of property, plant and equipment
Loss on sale of property, plant and equipment
Profit on sale of subsidiary undertakings
Amortisation of intangible assets
Impairment losses on loans and advances to customers
Share based compensation
Profit on sale of equity instruments available-for-sale
Cash flows from operating profits before changes in operating assets
and liabilities
Changes in operating assets and liabilities:
– net decrease/(increase) in debt securities held-to-maturity
– net increase in loans and advances to customers
– net decrease in other assets
– net increase in amounts due to banks
– net increase in deposits from customers
– net (decrease)/increase in other liabilities
Income tax paid
Proceeds from sale of equity instruments available-for-sale
Net cash inflow/(outflow) from operating activities –
Continuing operations
Cash flows from investing activities
Sale of subsidiary undertakings
Sale of discontinued operation
Purchase of property, plant and equipment
Purchase of computer software
Net cash inflow from investing activities – Continuing operations
Cash flows from financing activities
Issue of shares
Dividends paid
Note
15
16
37
37
15
16
Net cash outflow from financing activities – Continuing operations
Net increase/(decrease) in cash and cash equivalents
Net increase in cash and cash equivalents – Discontinued operations
Cash and cash equivalents at 1 January
Cash and cash equivalents at 31 December
27
The notes on pages 117 to 181 are an integral part of these consolidated financial statements.
116
Year ended
31 December
2017
£million
Year ended
31 December
2016
£million
22.2
2.7
0.4
–
–
1.0
35.1
–
(0.3)
61.1
15.0
(378.9)
0.6
43.0
331.4
(11.5)
(2.6)
16.6
74.7
–
37.1
(0.3)
(3.3)
33.5
–
(14.0)
(14.0)
94.2
35.7
128.5
258.4
125.3
3.3
0.4
0.2
(120.5)
0.5
24.2
0.2
–
33.6
(16.2)
(393.9)
2.6
33.6
118.7
28.1
(3.5)
–
(197.0)
212.3
–
(2.0)
(3.5)
206.8
2.0
(43.1)
(41.1)
(31.3)
18.8
141.0
128.5
Strategic Report
Corporate Governance Report
Financial Statements
Notes to the consolidated financial statements
1. Accounting policies
The principal accounting policies applied in the preparation of these consolidated financial statements are set out below.
These policies have been consistently applied to all the years presented, unless otherwise stated.
1.1 Reporting entity
Secure Trust Bank PLC is a company incorporated in the United Kingdom (referred to as ‘the Company’). The Company is
registered in England and Wales and has the registered number 00541132. The registered address of the Company is
One Arleston Way, Solihull, West Midlands, B90 4LH. The consolidated financial statements of the Company as at and for
the year ended 31 December 2017 comprise Secure Trust Bank PLC and its subsidiaries (together referred to as ‘the Group’
and individually as ‘subsidiaries’). The Group is primarily involved in banking and financial services.
1.2 Basis of presentation
The Group’s consolidated financial statements and the Company’s financial statements have been prepared in accordance
with International Financial Reporting Standards, as adopted by the Group and endorsed by the EU and the Companies
Act 2006 applicable to companies reporting under IFRS. They have been prepared under the historical cost convention, as
modified by the revaluation of equity instruments available-for-sale and land and buildings and financial instruments at fair
value through profit or loss. The consolidated financial statements are presented in pounds sterling, which is the functional
and presentational currency of the entities within the Group.
The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates.
It also requires management to exercise its judgement in the process of applying the Group’s accounting policies.
The areas involving a higher degree of judgement or complexity or areas where assumptions and estimates are significant
to the consolidated financial statements are disclosed in Note 2.
The directors have assessed, in the light of current and anticipated economic conditions, the Group’s ability to continue
as a going concern. The directors confirm they are satisfied that the Company and the Group have adequate resources
to continue in business for the foreseeable future. For this reason, they continue to adopt the ‘going concern’ basis for
preparing accounts, as set out in the going concern and viability section of the Strategic Report starting on page 2.
The consolidated financial statements were authorised for issue by the Board of Directors on 21 March 2018.
The following International Financial Reporting Standards, which have been endorsed by the EU, have been issued but
are not yet effective and have not been adopted early:
• IFRS 9 ‘Financial Instruments’ (effective for annual periods beginning after 1 January 2018). This is the International
Accounting Standards Board’s replacement of IAS 39 ‘Financial Instruments: Recognition and Measurement’. Based on
assessments undertaken to date, the estimated adjustment (net of tax) of the adoption of IFRS 9 on the opening balance
of the Group’s equity at 1 January 2018 is expected to be a reduction in the range of £22 million to £27 million.
This represents:
- £nil related to the classification requirements (refer to Note 29 for further information);
- An expected reduction in the range of £28 million to £34 million related to the impairment requirements (refer to
Note 29 for further information). This reduction is primarily attributable to Consumer Finance. The Business Finance
portfolio is not expected to drive a material reduction; and
- An increase in the range of £6 million to £7 million related to associated deferred tax impacts.
The above are estimates and will not be finalised until all transition work has been completed. The actual impact of
adopting IFRS 9 may change as the Group continues to refine and finalise its models for the expected credit loss (ECL)
calculations following validations undertaken both internally and by the Group’s incoming external auditors. The new
accounting policies, assumptions, judgements and estimation techniques are subject also to change until the Group
finalises its interim report for the six months ended 30 June 2018.
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Secure Trust Bank PLC Annual Report & Accounts 2017
Straightforward transparent banking
Notes to the consolidated financial statements
continued
1. Accounting policies continued
• IFRS 15 ‘Revenue from contracts with customers’ (effective for annual periods beginning after 1 January 2018).
This standard replaces a number of existing standards and interpretations and applies to contracts with customers, but
does not apply to insurance contracts, financial instruments or lease contracts, which are in the scope of other IFRS. It also
does not apply if two companies in the same line of business exchange non-monetary assets to facilitate sales to other
parties. The standard specifies how and when an IFRS reporter will recognise revenue as well as requiring such entities to
provide users of financial statements with more informative relevant disclosures. It introduces a new revenue recognition
model that recognises revenue either at a point in time or over time. The model features a principles-based five-step
model to be applied to all contracts with customers. Following consideration of the Group’s operating model, it has
been concluded that this standard will not have a material impact on the Group.
• IFRS 16 ‘Leases’ (effective for annual periods beginning after 1 January 2019). The standard sets out the principles for the
recognition, measurement, presentation and disclosure of leases for both parties to a contract i.e. the customer (‘lessee’)
and the supplier (‘lessor’). IFRS 16 replaces the previous leases standard, IAS 17 ‘Leases’, and related interpretations.
IFRS 16 eliminates the classification of leases as either operating leases or finance leases for a lessee. Instead all leases,
except short term and low value leases, are treated in a similar way to finance leases applying IAS 17. Leases are
‘capitalised’ by recognising the present value of the lease payments and showing them either as lease assets (right-of-use
assets) or together with property, plant and equipment. If lease payments are made over time, a company also recognises
a financial liability representing its obligation to make future lease payments. The most significant effect of the new
requirements in IFRS 16 will be an increase in lease assets and financial liabilities. The effect of this standard is currently
being assessed, but it is unlikely to be substantial. Lessor accounting remains unchanged from IAS 17.
1.3 Change in accounting policy
Charge-off of debt sold by Secure Trust Bank PLC to Debt Managers (Services) Limited
Previously, when debt was sold by Secure Trust Bank PLC to its subsidiary Debt Managers (Services) Limited, the debt was
‘charged off’, i.e. the gross receivable and associated impairment provision were written off, when Debt Managers (Services)
Limited considered that the remaining debt was unlikely to be recovered. The Group considers that it better reflects the
economic reality to charge off the debt at the point of its sale to Debt Managers (Services) Limited.
This has resulted in a reduction of both gross receivables and impairment provision of £32.1 million at 31 December 2016.
There is no impact on net receivables or the income statement. Further information is provided in Note 10.
1.4 Consolidation
Subsidiaries
Subsidiaries are all investees controlled by the Group. The Group controls an investee when it is exposed, or has rights,
to variable returns from its involvement with the investee and has the ability to affect those returns through its power over
the investee. Subsidiaries are fully consolidated from the date on which control is transferred to the Group.
The acquisition method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of an
acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed
at the date of exchange plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and
contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date,
irrespective of the extent of any non-controlling interest. The excess of the cost of acquisition over the fair value of the
Group’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the
fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the income statement.
The parent company’s investments in subsidiaries are recorded at cost less, where appropriate, provision for impairment
in value.
Inter-company transactions, balances and unrealised gains and losses on transactions between Group companies are
eliminated. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies
adopted by the Group.
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1. Accounting policies continued
Discontinued operations
Subsidiaries are de-consolidated from the date that control ceases. Discontinued operations are a component of an entity
that has been disposed of, and represents a major line of business and is part of a single co-ordinated disposal plan.
1.5 Interest income and expense
Interest income and expense are recognised in the income statement for all instruments measured at amortised cost using
the effective interest method.
The effective interest method calculates the amortised cost of a financial asset or a financial liability and allocates the interest
income or interest expense over the relevant period. The effective interest rate is the rate that discounts estimated future
cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the
net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the Group takes
into account all contractual terms of the financial instrument but does not consider future credit losses. The calculation
includes all fees paid or received between parties to the contract that are an integral part of the effective interest rate,
transaction costs and all other premiums or discounts.
Once a financial asset or a group of similar financial assets has been written down as a result of an impairment loss, interest
income is recognised using the rate of interest used to discount the future cash flows for the purpose of measuring the
impairment loss.
1.6 Net fee and commission income
Fees and commissions which are not considered integral to the effective interest rate are generally recognised on an accruals
basis when the service has been provided.
1.7 Financial assets and financial liabilities
The Group classifies its financial assets as fair value through profit or loss, loans and receivables, held-to-maturity or
available-for-sale and classifies its financial liabilities as other financial liabilities. Management determines the classification
of its investments at initial recognition. A financial asset or financial liability is measured initially at fair value plus, for an item
not at fair value through profit or loss, transaction costs that are directly attributable to its acquisition or issue.
(a) Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an
active market. They arise when the Group provides money, goods or services directly to a debtor with no intention of trading
the receivable. Loans are recognised when the funds are advanced to customers. Loans and receivables are carried at
amortised cost using the effective interest method (see over the page).
(b) Held-to-maturity
Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities
that the Group’s management has the positive intention and ability to hold to maturity. Held-to-maturity investments are
carried at amortised cost using the effective interest method.
(c) Available-for-sale
Available-for-sale (‘AFS’) investments are those not classified as another category of financial assets. These comprised equity
investments in a quoted company. They may be sold in response to liquidity requirements or equity price movements.
AFS investments are initially recognised at cost, which is considered as the fair value of the investment including any
acquisition costs. AFS investments are subsequently measured at fair value in the statement of financial position. Fair value
changes on the AFS securities are recognised in the statement of other comprehensive income and in equity (AFS reserve),
until the investment is sold or impaired. Once sold or impaired, the cumulative gains or losses previously recognised in the
AFS reserve are recycled to the income statement.
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Notes to the consolidated financial statements
continued
1. Accounting policies continued
(d) Other financial liabilities
Other financial liabilities are non-derivative financial liabilities with fixed or determinable payments. Other financial liabilities
are recognised when cash is received from the depositors. Other financial liabilities are carried at amortised cost using the
effective interest method. The fair value of other liabilities repayable on demand is assumed to be the amount payable on
demand at the statement of financial position date.
Derecognition
Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or where the
Group has transferred substantially all of the risks and rewards of ownership. There have not been any instances where assets
have only been partially derecognised. The Group derecognises a financial liability when its contractual obligations are
discharged, cancelled or expire.
Amortised cost measurement
The amortised cost of a financial asset or financial liability is the amount at which the financial asset or financial liability is
measured at initial recognition, minus principal payments, plus or minus the cumulative amortisation using the effective
interest method of any difference between the initial amount recognised and the maturity amount, minus any reduction
for impairment.
Fair value measurement
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. The fair value of assets and liabilities traded in active markets are based on
current bid and offer prices respectively. If the market for a financial instrument is not active the Group establishes a fair value
by using an appropriate valuation technique. These include the use of recent arm’s length transactions, reference to other
instruments that are substantially the same for which market observable prices exist, net present value and discounted cash
flow analysis.
1.8 Foreign currencies
Transactions in foreign currencies are initially recorded at the rates of exchange prevailing on the dates of the transactions.
Monetary assets and liabilities denominated in foreign currencies are retranslated into the Company’s functional currency at
the rates prevailing on the balance sheet date. Exchange differences arising on the settlement of monetary items, and on
the retranslation of monetary items, are included in the income statement for the period.
1.9 Impairment of financial assets
Assets carried at amortised cost
On an ongoing basis the Group assesses whether there is objective evidence that a financial asset or group of financial assets
is impaired. Objective evidence is the occurrence of a loss event, after the initial recognition of the asset, that impacts on the
estimated future cash flows of the financial asset or group of financial assets, and can be reliably estimated.
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1. Accounting policies continued
The criteria that the Group uses to determine that there is objective evidence of an impairment loss include, but are not
limited to, the following:
• Delinquency in contractual payments of principal or interest;
• Breach of financial covenants or contractual obligations;
• Cash flow difficulties experienced by the borrower; and
• Initiation of bankruptcy proceedings.
If there is objective evidence that an impairment loss on loans and receivables or held-to-maturity investments carried at
amortised cost has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount
and the present value of estimated future cash flows discounted at the financial asset’s original effective interest rate.
The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss
is recognised in the income statement. If a loan or held-to-maturity investment has a variable interest rate, the
discount rate for measuring any impairment loss is the current effective interest rate determined under the contract.
The Group considers evidence of impairment for loans and advances at both an individual asset and collective level.
All individually significant loans and advances are assessed for specific impairment. Those found not to be specifically
impaired are then collectively assessed for any impairment that has been incurred but not yet identified. In assessing
collective impairment the Group uses historical trends of the probability of default, emergence period, the timing of
recoveries and the amount of loss incurred, adjusted for management’s judgement as to whether current economic and
credit conditions are such that the actual losses are likely to be significantly different to historic trends.
When a loan is uncollectible, it is written off against the related provision for loan impairment. Such loans are written off after
all the necessary procedures have been completed and the amount of the loss has been determined. Subsequent recoveries
of amounts previously written off decrease the amount of the provision for loan impairment in the income statement.
Business Finance
In assessing objective evidence of a loss event for business loans, the following factors are considered:
• If any contractual repayment date has been missed;
• Covenant breaches; and
• In Commercial Finance, a loan may be considered for potential impairment if the financial prospects of the borrower’s
customers deteriorates.
Consumer Finance
For consumer loans, cash flows are estimated based on past experience combined with the Group’s view of the future
considering the following factors:
• Our exposure to the customer;
• Based on the number of days in arrears at the statement of financial position date, the likelihood that a loan will progress
through the various stages of delinquency and ultimately be written off; and
• The amount and timing of expected receipts and recoveries.
Modification of loans
A customer’s account may be modified to assist customers who are in or have recently overcome financial difficulties and
have demonstrated both the ability and willingness to meet the current or modified loan contractual payments. Loans that
have renegotiated or deferred terms, resulting in a substantial modification to the cash flows, are no longer considered to
be past due but are treated as new loans recognised at fair value, provided the customers comply with the renegotiated or
deferred terms.
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Notes to the consolidated financial statements
continued
1. Accounting policies continued
1.10 Intangible assets
(a) Goodwill
Goodwill represents the excess of the cost of the acquisition over the fair value of the Group’s share of the net identifiable
assets acquired at the date of acquisition. Goodwill is held at cost less accumulated impairment losses and is deemed to have
an infinite life.
The Group reviews the goodwill for impairment at least annually or when events or changes in economic circumstances
indicate that impairment may have taken place. Impairment losses are recognised in the income statement if the carrying
amount exceeds the recoverable amounts.
(b) Computer software
Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring to use the
specific software.
Costs associated with developing or maintaining computer software programs are recognised as an expense as incurred
unless the technical feasibility of the development has been demonstrated, and it is probable that the expenditure will
enable the asset to generate future economic benefits in excess of its originally assessed standard of performance, in which
case they are capitalised.
These costs are amortised on the basis of the expected useful lives, which are between 3 to 10 years.
(c) Other intangibles
The acquisition of subsidiaries was accounted for in accordance with IFRS 3 ‘Business Combinations’, which requires the
recognition of the identifiable assets acquired and liabilities assumed at their acquisition date fair values. As part of this
process, it was necessary to recognise certain intangible assets which are separately identifiable and which are not included
on the acquiree’s balance sheet, which are amortised over their expected useful lives, as set out in Note 16.
1.11 Property, plant and equipment
Property is held at its revalued amount, being its fair value at the date of valuation less any subsequent accumulated
depreciation. Revaluations are carried out annually at the reporting date, and movements are recognised in other
comprehensive income, net of any applicable deferred tax.
Plant and equipment is stated at historical cost less depreciation. Historical cost includes expenditure that is directly
attributable to the acquisition of the items. Pre-installed computer software licences are capitalised as part of the computer
hardware it is installed on. Depreciation is calculated using the straight-line method to allocate their cost to their residual
values over their estimated useful lives, which are subject to regular review:
Land
Freehold buildings
Leasehold improvements
Computer equipment
Other equipment
not depreciated
50 years
shorter of life of lease or 7 years
3 to 5 years
5 to 10 years
Gains and losses on disposals are determined by comparing proceeds with carrying amounts. These are included in the
income statement.
1.12 Leases
(a) As a lessor
Assets leased to customers under agreements which transfer substantially all the risks and rewards of ownership, with or
without ultimate legal title, are classified as finance leases. When assets are held subject to finance leases, the present value
of the lease payments is recognised as a receivable. The difference between the gross receivable and the present value of the
receivable is recognised as unearned finance income. Lease income is recognised over the term of the lease using the net
investment method, which reflects a constant periodic rate of return.
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1. Accounting policies continued
(b) As a lessee
Rentals made under operating leases are recognised in the income statement on a straight-line basis over the term
of the lease.
1.13 Cash and cash equivalents
For the purposes of the statement of cash flows, cash and cash equivalents comprise cash in hand and demand deposits,
and cash equivalents comprise highly liquid investments which are convertible into cash with an insignificant risk of changes
in value with a maturity of three months or less at the date of acquisition, including certain loans and advances to banks and
short-term highly liquid debt securities.
1.14 Equity instruments
Equity instruments issued by the Company are recorded at the proceeds received, net of direct issuance costs. Any amounts
received over nominal value are recorded in the share premium account, net of direct issuance costs. Costs associated with
the listing of shares are expensed immediately.
1.15 Employee benefits
(a) Post-retirement obligations
The Group contributes to defined contribution schemes for the benefit of certain employees. The schemes are funded
through payments to insurance companies or trustee-administered funds at the contribution rates agreed with individual
employees. The Group has no further payment obligations once the contributions have been paid. The contributions are
recognised as an employee benefit expense when they are due. There are no post-retirement benefits other than pensions.
(b) Share-based compensation
The fair value of equity settled share-based payment awards are calculated at grant date and recognised over the period
in which the employees become unconditionally entitled to the awards (the vesting period). The amount is recognised as
personnel expenses in the income statement, with a corresponding increase in equity. Further details of the valuation
methodology is set out in Note 26.
The fair value of cash settled share-based payments is recognised as personnel expenses in the income statement with
a corresponding increase in liabilities over the vesting period. The liability is remeasured at each reporting date and
at settlement date based on the fair value of the options granted, with a corresponding adjustment to personnel expenses.
1.16 Taxation
Current income tax which is payable on taxable profits is recognised as an expense in the period in which the profits arise.
Deferred tax is provided in full on temporary differences arising between the tax bases of assets and liabilities and their
carrying amounts in the consolidated financial statements. Deferred tax is determined using tax rates (and laws) that have
been enacted or substantially enacted by the statement of financial position date and are expected to apply when the related
deferred tax asset is realised or the deferred tax liability is settled.
Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax assets and liabilities, and
they relate to taxes levied by the same tax authority on the same taxable entity, or on different tax entities, when they intend
to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realised simultaneously.
Deferred tax assets are recognised where it is probable that future taxable profits will be available against which the
temporary differences can be utilised.
1.17 Dividends
Dividends on ordinary shares are recognised in equity in the period in which they are approved by Shareholders.
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Notes to the consolidated financial statements
continued
1. Accounting policies continued
1.18 Funding for Lending Scheme and Term Funding Scheme
Under the applicable International Accounting Standard, IAS 39, if a security is lent under an agreement to return it to
the transferor, as is the case for eligible securities lent by institutions to the Bank of England under the Funding for Lending
Scheme, then the security is not derecognised because the transferor retains all the risks and rewards of ownership.
The UK Treasury Bills borrowed from the Bank of England under the Funding for Lending Scheme are not recognised on
the statement of financial position of the institution until such time as they are subject to a repurchase agreement with
a third party, as they will not meet the criteria for derecognition by the Bank of England. When the UK Treasury Bills are
pledged as part of a sale and repurchase agreement with a third party, amounts borrowed from the third party are recognised
in the statement of financial position.
Under the new Term Funding Scheme, the Bank borrows cash and this is recognised in the consolidated statement of
financial position within cash and cash equivalents, with the corresponding loan being recognised in liabilities to banks.
2. Critical judgements and estimates
Judgements
In the course of preparing the financial statements, no judgements have been made in applying the Group’s accounting
policies, other than those involving estimations, that have had a significant effect on the amounts recognised in the
financial statements.
Estimates
The Group makes certain estimates which affect the reported amounts of assets and liabilities. The following areas are those
where assumptions and estimates at the end of the current reporting period have a significant risk of resulting in a material
adjustment to the carrying amounts of assets and liabilities within the next financial year:
2.1 Impairment losses on loans and advances to customers
Where financial assets are individually evaluated for impairment, management uses their best estimates in calculating the net
present value of future cash flows. Management has to make estimates on the financial position of the counterparty and the
net realisable value of collateral (where held), in determining the expected future cash flows.
In assessing collective impairment the Group uses historical trends of the probability of default, the timing of recoveries and
the amount of loss incurred, adjusted for management’s estimate as to whether current economic and credit conditions are
such that the actual losses are likely to be significantly different to historic trends.
Consumer Finance
The Group reviews its Consumer Finance loan portfolios to assess impairment at least on a half-yearly basis. The basis for
evaluating impairment losses is described in accounting policy 1.9. In determining whether an impairment loss should be
recorded in the income statement, the Group makes estimates as to whether there is any observable data indicating that
there is a measurable decrease in the estimated future cash flows from financial assets, or a group of financial assets.
This evidence may include observable data indicating that there has been an adverse change in the payment status of
borrowers in a group, or national or local economic conditions that correlate with defaults on assets in the group. Loans
and advances are identified as impaired by taking account of the age of the debt’s delinquency and the product type.
The impairment provision is calculated by applying a percentage rate to the balance of different ages and categories of
impaired debt. The methodology and assumptions used for estimating both the amount and timing of future cash flows
are reviewed regularly to reduce any differences between loss estimates and recent actual loss experience.
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2. Critical judgements and estimates continued
The key estimates made in calculating the consumer individual provisions are the probability of default rates and the loss
given default. Uplifting the probability of each by 10% would result in an estimated increase in the Consumer Finance
individual provisions as follows:
Personal Lending
Motor Finance
Retail Finance
2017
10% increase
in probability
of default rates
£million
2017
10% increase
in loss given
default
£million
2016
10% increase
in probability
of default rates
£million
2016
10% increase
in loss given
default
£million
N/A
0.3
0.3
0.6
N/A
2.3
0.6
2.9
0.2
0.3
0.1
0.6
0.3
1.6
0.4
2.3
Of the £2.3 million (2016: £1.6 million) sensitivity to loss given default in Motor Finance above, an estimated £0.9 million
(2016: £0.8 million) relates to the expected loss on the sale of repossessed vehicles.
The collective provision for the consumer portfolio assumes an emergence period of 2 months for the Motor Finance and
Personal Loan portfolios and 1 month for the Retail Finance portfolio. Increasing this assumption by 1 month would result
in an estimated increase in the collective impairment allowance as follows:
Personal Lending
Motor Finance
Retail Finance
2017
£million
N/A
1.0
1.1
2.1
2016
£million
0.5
0.8
0.9
2.2
Business Finance
Within the Real Estate Finance and Asset Finance businesses, accounts which are impaired are assessed against the
discounted cash flows expected to arise in order to identify any impairment provisions. Collective provisions are assessed
only to the extent that there is sufficient data to justify an inherent level of losses within the current portfolios.
For specific Commercial Finance clients assessment is made as to the collectability of outstanding invoices in relation to the
amounts lent against them. If there is a deficit against outstanding invoices then other security is considered in terms of value
and collectability. If there is an overall shortfall then the unsecured amount is assessed as to whether a provision is required.
For collective provisions a view of the overall level of non-collectability in the portfolio is taken. The level of provision
required is under review as the product is yet to mature, and therefore data is developing, so the Group has estimated
a level appropriate based on other data available in the industry.
The Business Finance portfolio is largely assessed on an individual basis with minimal losses experienced to date.
The decision on whether or not an impairment trigger has occurred for Real Estate Finance loans is made based on the
Group’s knowledge of the counterparty and assessment of their ability to repay their loan balance. The Real Estate Finance
portfolio is exposed to deteriorations in property prices, in the event of borrower default. However, given the low loan to
value ratios of loans held within the portfolio, this exposure is not considered significant.
The collective provision for the Asset Finance portfolio assumes an emergence period of three months. The collective
provision for the Commercial Finance and Real Estate Finance portfolios are based on peer group experience of comparable
groups of financial assets and determined as 0.15% and 0.1% of gross balances net of specific provisions respectively.
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Notes to the consolidated financial statements
continued
2. Critical judgements and estimates continued
2.2 Average life of lending
IAS 39 requires interest earned from lending to be measured under the effective interest rate method. The effective interest
rate is the rate that exactly discounts estimated future cash receipts or payments through the expected life of the financial
instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset.
Management must therefore use estimates to estimate the expected life of each instrument and hence the expected cash
flows relating to it. The accuracy of these estimates would therefore be affected by unexpected market movements resulting
in altered customer behaviour, inaccuracies in the models used compared to actual outcomes and incorrect assumptions.
The Group also needs to identify which cash flows relating to each instrument should be subject to the effective interest
rate method.
A one month increase in the assumed behavioural life would change the income received in the year as follows:
Personal Lending
Motor Finance
Retail Finance
2017
£million
N/A
0.2
0.4
0.6
2016
£million
–
0.1
(0.6)
(0.5)
2.3 Reassessment of critical estimates
During the year, Management reassessed the critical estimates and resolved that the assumptions used to estimate
acquisition accounting and share option scheme valuations were not sensitive enough to change the balances materially,
and therefore were no longer considered critical.
3. Operating segments
The Group is organised into seven operating segments, which consist of the different products available, disclosed below:
Business Finance
1) Real Estate Finance: residential and commercial investment and development loans secured by UK real estate.
2) Asset Finance: loans to small and medium sized enterprises to acquire commercial assets.
3) Commercial Finance: invoice discounting and invoice factoring.
Consumer Finance
4) Personal Lending: Unsecured consumer loans sold to customers via broker aggregators and business partners.
5) Motor Finance: Hire purchase agreements secured against the vehicle being financed.
6) Retail Finance: Point of sale unsecured finance for in-store and online retailers.
Consumer Mortgages
7)
Residential mortgages for the self-employed, contract workers, those with complex income and those with a recently
restored credit history, sold via select mortgage intermediaries.
Other
Other includes OneBill, current accounts, STB Leasing Limited, debt collection and a £30 million loan to Non-Standard
Finance plc (NSF) as part of their purchase of ELG, which was repaid during the year. All current accounts were closed
by the end of 2016, and OneBill has been closed to new customers since 2009.
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3. Operating segments continued
Management review these segments by looking at the income, size and growth rate of the loan books, impairments and
customer numbers. Except for these items no costs or balance sheet items are allocated to the segments.
Year ended 31 December 2017
Business Finance
Real Estate Finance
Asset Finance
Commercial Finance
Consumer Finance
Motor Finance
Retail Finance
Consumer Mortgages
Other
Continuing operations
Discontinued operations
Personal Lending
Year ended 31 December 2016
Business Finance
Real Estate Finance
Asset Finance
Commercial Finance
Consumer Finance
Motor Finance
Retail Finance
Other
Continuing operations
Discontinued operations
Personal Lending
Interest
receivable and
similar income
£million
Fee and
commission
income
£million
Revenue from
external
customers
£million
Net impairment
losses on loans
and advances to
customers
£million
Loans and
advances to
customers
£million
32.1
8.5
2.5
46.2
47.5
0.1
4.4
141.3
8.0
149.3
0.2
–
4.7
0.9
3.2
–
7.0
32.3
8.5
7.2
47.1
50.7
0.1
11.4
(0.2)
1.0
0.1
20.8
13.8
–
(2.0)
580.8
116.7
126.5
274.6
452.3
16.5
30.9
16.0
157.3
33.5
1,598.3
–
8.0
3.4
–
16.0
165.3
36.9
1,598.3
Interest
receivable and
similar income
£million
Fee and
commission
income
£million
Revenue from
external
customers
£million
Net impairment
losses on loans
and advances to
customers
£million
Loans and
advances to
customers
£million
28.3
7.8
1.5
39.6
34.3
7.3
118.8
22.3
141.1
0.1
–
3.1
0.9
2.4
9.8
16.3
0.1
16.4
28.4
7.8
4.6
40.5
36.7
17.1
135.1
22.4
157.5
0.1
0.6
0.2
14.6
9.5
(1.7)
451.0
117.2
62.8
236.2
325.9
62.4
23.3
1,255.5
7.0
65.5
30.3
1,321.0
The ‘other’ segment above includes products which are individually below the quantitative threshold for separate disclosure
and fulfils the requirement of IFRS 8.28 by reconciling operating segments to the amounts reported in the financial
statements. Currently, the Consumer Mortgages segment also falls below this threshold, but the directors consider that this
segment represents a key part of the future strategy of the Group, and therefore merits separate disclosure.
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Notes to the consolidated financial statements
continued
3. Operating segments continued
Funding costs and operating expenses are not aligned to operating segments for day to day management of the business,
so they cannot be allocated on a reliable basis. Accordingly, profit by operating segment has not been disclosed.
All of the Group’s operations are conducted wholly within the United Kingdom and geographical information is therefore
not presented.
4. Operating income
a) Net interest income
Cash and balances at central banks
Loans and advances to banks
Loans and advances to customers
Interest receivable and similar income
Deposits from customers
Interest expense and similar charges
Net interest income
2017
£million
0.4
0.2
140.7
141.3
(26.7)
(26.7)
114.6
2016
£million
0.6
–
118.2
118.8
(26.3)
(26.3)
92.5
The net interest income shown above excludes £8.0 million (2016: £22.3 million) of interest on loans and advances to
customers in respect of discontinued operations, as shown in the income statement as set out on page 110.
b) Net fee and commission income
Fee and disbursement income
Commission income
Other income
Fee and commission income
Other expenses
Fee and commission expense
Net fee and commission income
2017
£million
2016
£million
12.4
2.7
0.9
16.0
(1.1)
(1.1)
14.9
12.3
3.6
0.4
16.3
(1.8)
(1.8)
14.5
Fees and commissions income consists principally of the following:
• weekly and monthly fees from the OneBill product;
• associated insurance commissions and commissions earned on debt collection activities in DMS;
• discounting, service and arrangement fees in Commercial Finance; and
• account management and administration fees from retailers in Retail Finance.
Fee and commission expenses consist primarily of fees payable in respect of Motor Finance.
128
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Financial Statements
5. Operating expenses
Staff costs, including those of directors:
Wages and salaries
Social security costs
Pension costs
Share based payment transactions
Depreciation of property, plant and equipment
(Note 15)
Amortisation of intangible assets (Note 16)
Operating lease rentals
Other administrative expenses
Total operating expenses
Continuing
2017
£million
Discontinued
2017
£million
Total
2017
£million
Continuing
2016
£million
Discontinued
2016
£million
Total
2016
£million
33.8
4.2
1.2
(0.2)
0.8
2.0
1.5
28.0
71.3
0.3
–
–
–
–
–
–
–
0.3
34.1
4.2
1.2
(0.2)
0.8
2.0
1.5
28.0
71.6
31.5
3.1
0.9
(0.5)
0.6
1.6
1.6
25.5
64.3
3.5
0.3
0.2
–
–
–
0.3
2.9
7.2
35.0
3.4
1.1
(0.5)
0.6
1.6
1.9
28.4
71.5
As described in Note 3, operating expenses are not aligned to operating segments for day to day management of the
business, so they cannot be allocated on a reliable basis. Accordingly, discontinued operating expenses above relates only
to those costs that are directly attributable to the discontinued business.
Remuneration of the auditor and its associates, excluding VAT, was as follows:
Fees payable to the Company’s auditor for the audit of the Company’s
annual accounts
Fees payable to the Company’s auditor for other services:
The audit of the Company’s subsidiaries, pursuant to legislation
Audit related assurance services
Other assurance services
All other non-audit services
2017
£’000
270
68
100
62
39
539
2016
£’000
149
63
13
521
15
761
Other assurance services related to the half year review (2016: related to reporting accountant work in respect of the
Main Market listing).
All other non-audit services related to profit certification, work relating to entry into the Term Funding Scheme and advice
on a potential corporate acquisition (2016: related to profit certification and work relating to entry into the Funding for
Lending Scheme).
6. Average number of employees
Directors
Management
Administration
The prior year figures above include employees of ELG for the period of ownership by the Group.
www.securetrustbank.co.uk
2017
Number
2016
Number
8
116
610
734
6
101
590
697
129
Secure Trust Bank PLC Annual Report & Accounts 2017
Straightforward transparent banking
Notes to the consolidated financial statements
continued
7. Income tax expense
Current taxation
Corporation tax charge – current year
Corporation tax charge – adjustments in respect
of prior years
Deferred taxation
Deferred tax charge – current year
Deferred tax charge – adjustments in respect of
prior years
Income tax expense
Tax reconciliation
Profit before tax
Tax at 19.25% (2016: 20.0%)
Permanent differences
Prior period adjustments
Income tax expense for the year
Continuing
operations
2017
£million
Discontinued
operations
2017
£million
Total
2017
£million
Continuing
operations
2016
£million
Discontinued
operations
2016
£million
Total
2016
£million
5.5
–
5.5
(0.5)
0.1
(0.4)
5.1
25.0
4.8
0.2
0.1
5.1
0.8
–
0.8
–
–
–
0.8
4.3
0.8
–
–
0.8
6.3
–
6.3
(0.5)
0.1
(0.4)
5.9
29.3
5.6
0.2
0.1
5.9
3.1
1.8
4.9
–
0.3
0.3
5.2
19.4
3.9
(0.8)
2.1
5.2
1.7
–
1.7
(0.1)
–
(0.1)
1.6
8.1
1.6
–
–
1.6
4.8
1.8
6.6
(0.1)
0.3
0.2
6.8
27.5
5.5
(0.8)
2.1
6.8
On 26 October 2015, the Government substantively enacted a reduction in the main rate of UK corporation tax from 20%
to 19% (effective from 1 April 2017). Subsequently, a further reduction to 17% (effective 1 April 2020) was also substantively
enacted on 6 September 2016. This will reduce the Company’s future current tax charge accordingly.
8. Earnings per ordinary share
Basic
Basic earnings per ordinary share are calculated by dividing the profit attributable to equity holders of the parent by the
weighted average number of ordinary shares as follows:
Profit attributable to equity holders of the parent (£ millions)
Continuing operations
Discontinued operations
2017
19.9
3.9
23.8
2016
14.2
123.3
137.5
Weighted average number of ordinary shares (number)
18,475,229
18,234,588
130
Strategic Report
Corporate Governance Report
Financial Statements
8. Earnings per ordinary share continued
Diluted
Diluted earnings per ordinary share are calculated by dividing the profit attributable to equity holders of the parent by the
weighted average number of ordinary shares in issue during the year, as noted above, as well as the number of dilutive share
options in issue during the year, as follows:
Weighted average number of ordinary shares
Number of dilutive shares in issue at the year end
Fully diluted weighted average number of ordinary shares
Dilutive shares being based on:
Number of options outstanding at the year end
Weighted average exercise price (pence)
Average share price during the period (pence)
9. Loans and advances to banks
2017
2016
18,475,229
219,007
18,694,236
368,063
799
1,974
18,234,588
130,200
18,364,788
177,084
720
2,720
Group
2017
£million
Group
2016
£million
Company
2017
£million
Company
2016
£million
Placements with banks included in cash and cash equivalents (Note 27)
34.3
18.2
32.3
16.5
Included within loans and advances to banks are amounts placed with Arbuthnot Latham & Co., Limited, a related company
prior to the sale of its controlling stake in the Group, of £5.0 million (31 December 2016: £5.0 million).
Moody’s long-term ratings are as follows:
A1
A3
Arbuthnot Latham & Co., Limited – No rating
None of the loans and advances to banks are either past due or impaired.
10. Loans and advances to customers
Gross loans and advances
Less: allowances for impairment on loans and advances (Note 12)
Group
2017
£million
Group
2016
£million
Company
2017
£million
Company
2016
£million
6.1
23.2
5.0
34.3
4.6
8.6
5.0
18.2
6.0
21.3
5.0
32.3
4.6
6.9
5.0
16.5
Group
2017
£million
1,638.2
(39.9)
Group
2016
£million
1,349.4
(28.4)
Company
2017
£million
1,605.4
(39.9)
Company
2016
£million
1,316.9
(27.7)
1,598.3
1,321.0
1,565.5
1,289.2
www.securetrustbank.co.uk
131
Secure Trust Bank PLC Annual Report & Accounts 2017
Straightforward transparent banking
Notes to the consolidated financial statements
continued
10. Loans and advances to customers continued
The Group has changed its policy on the charge-off of debt sold by Secure Trust Bank PLC to Debt Managers (Services)
Limited. A description of this change in accounting policy is set out in Note 1.3, the effect of which is set out below:
Gross loans and advances
As originally stated
Restatement
As restated
Allowances for impairment on loans and advances
As originally stated
Restatement
As restated
31 December
2017
£million
31 December
2016
£million
1,381.5
(32.1)
1,349.4
(60.5)
32.1
(28.4)
994.9
(10.9)
984.0
(34.3)
10.9
(23.4)
The fair value of loans and advances to customers is shown in Note 34. For a maturity profile of loans and advances
to customers, refer to Note 31.
Group and Company
At 31 December 2017 loans and advances to customers of £200.7 million were pre-positioned under the Bank of England’s
Term Funding Scheme, which replaced the Funding For Lending Scheme during the year (see below), and were available
for use as collateral within the scheme. At 31 December 2016 loans and advances to customers of £180.6 million were
pre-positioned under the Bank of England’s Funding for Lending Scheme and were available for use as collateral within
the scheme.
At 31 December 2016, £86.0 million of UK Treasury Bills were drawn under the Funding for Lending Scheme. During the
period, these Treasury Bills were pledged as part of a sale and repurchase agreement with an original maturity period of six
months. Monies arising as a result are disclosed in Note 20.
£597.3 million (2016: £451.0 million) of the loans are secured upon residential or commercial property and these are neither past
due nor impaired. All portfolios of loans secured are at an initial loan to value ratio of less than 85%. All property valuations at
loan inception, and the majority of development stage valuations, are performed by independent Chartered Surveyors, who
perform their work in accordance with the Royal Institution of Chartered Surveyors Valuation – Professional Standards.
Group
£2.5 million (2016: £2.9 million) of collateral is held from RentSmart, against loans of £17.2 million (2016: £18.7 million).
This collateral is included in trade payables at 31 December 2017. This is based upon the balance of customer receivables
and expected new agreements during the following month.
132
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Financial Statements
11. Finance lease receivables
Loans and advances to customers include finance lease receivables as follows:
Gross investment in finance lease receivables:
– No later than 1 year
– Later than 1 year and no later than 5 years
– Later than 5 years
Unearned future finance income on finance leases
Group
2017
£million
Group
2016
£million
Company
2017
£million
Company
2016
£million
189.9
374.2
1.2
565.3
(162.5)
163.5
347.0
1.5
512.0
(151.2)
180.7
367.7
1.2
549.6
(158.4)
151.7
338.9
1.5
492.1
(146.2)
Net investment in finance leases
402.8
360.8
391.2
345.9
The net investment in finance leases may be analysed as follows:
– No later than 1 year
– Later than 1 year and no later than 5 years
– Later than 5 years
12. Allowances for impairment of loans and advances
117.5
284.2
1.1
402.8
98.0
261.5
1.3
360.8
111.3
278.8
1.1
391.2
89.9
254.7
1.3
345.9
Group
Year ended 31 December 2017
Business Finance
Real Estate Finance
Asset Finance
Commercial Finance
Consumer Finance
Motor Finance
Voluntary termination provision
Other impairment
Retail Finance
Consumer Mortgages
Other
Individual
provision
£million
Collective
provision
£million
Total
provision
£million
Gross loans
and receivables
£million
Provision
cover
%
–
1.0
0.4
1.0
23.3
24.3
6.5
–
3.3
35.5
0.3
0.2
0.2
–
2.6
2.6
1.1
–
–
4.4
0.3
1.2
0.6
1.0
25.9
26.9
7.6
–
3.3
39.9
581.1
117.9
127.1
301.5
459.9
16.5
34.2
1,638.2
0.1%
1.0%
0.5%
8.9%
1.7%
0.0%
9.6%
2.4%
www.securetrustbank.co.uk
133
Secure Trust Bank PLC Annual Report & Accounts 2017
Straightforward transparent banking
Notes to the consolidated financial statements
continued
12. Allowances for impairment of loans and advances continued
Year ended 31 December 2016
Business Finance
Real Estate Finance
Asset Finance
Commercial Finance
Consumer Finance
Personal Lending
Motor Finance
Voluntary termination provision
Other impairment
Retail Finance
Other
Individual
provision
£million
Collective
provision
£million
Total
provision
£million
Gross loans
and receivables
£million
Provision
cover
%
–
0.4
0.4
3.5
0.6
10.0
10.6
4.0
4.2
23.1
0.5
0.1
0.1
0.7
–
3.0
3.0
0.9
–
5.3
0.5
0.5
0.5
4.2
0.6
13.0
13.6
4.9
4.2
451.5
117.7
63.3
69.7
249.8
330.8
66.6
28.4
1,349.4
0.1%
0.4%
0.8%
6.0%
5.4%
1.5%
6.3%
2.1%
Provisions included in ‘Other’ are in respect of various legacy products. This segment also includes loans of £17.2 million
(2016: £18.7 million) held in STB Leasing Limited. The credit risk associated with those loans is retained by its partner,
RentSmart. Accordingly, no provision is held against the RentSmart loans.
The Group net impairment losses disclosed in the income statement can be analysed as follows:
Individual provision: charge for impairment losses
Collective provision: charge for impairment losses
Loans written off, net of amounts utilised
Recoveries of loans written off
Less Personal Lending
2017
£million
2016
£million
36.4
(0.4)
1.4
(0.5)
36.9
(3.4)
33.5
25.1
3.3
1.2
(1.9)
27.7
(4.4)
23.3
134
Strategic Report
Corporate Governance Report
Financial Statements
12. Allowances for impairment of loans and advances continued
A reconciliation of the allowance accounts for losses on loans and advances is as follows:
2017
£million
2016
£million
Individual allowances for impairment
At 1 January
Charge for impairment losses
Amounts utilised
Changes to presentation in respect of debt sales
Sale of Personal Lending
At 31 December
Collective allowances for impairment
At 1 January
Charge for impairment losses
Sale of Personal Lending
At 31 December
Total allowances for impairment
Loans and advances to customers can be further summarised as follows:
Neither past due nor impaired
Not past due but impaired
Past due but not impaired
Past due up to 90 days and impaired
Past due after 90 days and impaired
Gross
Less: allowance for impairment
Net
2017
%
94.3%
0.3%
0.0%
2.3%
3.0%
100.0%
2017
£million
1,545.6
5.4
0.3
37.8
49.1
1,638.2
(39.9)
1,598.3
23.1
36.4
(13.5)
(3.6)
(6.9)
35.5
5.3
(0.4)
(0.5)
4.4
39.9
2016
£million
1,268.7
0.6
12.4
37.4
30.3
1,349.4
(28.4)
1,321.0
Gross amounts of loans and advances to customers that were past due up to 90 days and impaired were as follows:
Past due up to 30 days
Past due 30 – 60 days
Past due 60 – 90 days
Total
2017
£million
24.5
8.6
4.7
37.8
21.4
25.1
(10.7)
(12.7)
–
23.1
2.0
3.3
–
5.3
28.4
2016
%
94.1%
0.0%
0.9%
2.8%
2.2%
100.0%
2016
£million
24.4
7.9
5.1
37.4
During the period, the methodology used to derive the above analyses of loans and advances to customers, categorising
them into past due banding, was enhanced. Accordingly, the comparatives as at 31 December 2016 have been re-presented
on this basis.
www.securetrustbank.co.uk
135
Secure Trust Bank PLC Annual Report & Accounts 2017
Straightforward transparent banking
Notes to the consolidated financial statements
continued
12. Allowances for impairment of loans and advances continued
Gross amounts of loans and advances to customers that were past due but not impaired were as follows:
Past due up to 30 days
Past due 30 – 60 days
Total
Company
Year ended 31 December 2017
Business Finance
Real Estate Finance
Asset Finance
Commercial Finance
Consumer Finance
Motor Finance
Voluntary termination provision
Other impairment
Retail Finance
Consumer Mortgages
Other
Year ended 31 December 2016
Business Finance
Real Estate Finance
Asset Finance
Commercial Finance
Consumer Finance
Personal Lending
Motor Finance
Voluntary termination provision
Other impairment
Retail Finance
Other
136
2017
£million
0.2
0.1
0.3
2016
£million
4.6
7.8
12.4
Individual
provision
£million
Collective
provision
£million
Total
Gross loans
provision
£million
and receivables
£million
Provision
cover
%
–
1.0
0.4
1.0
23.3
24.3
6.5
–
3.3
35.5
0.3
0.2
0.2
–
2.6
2.6
1.1
–
–
4.4
0.3
1.2
0.6
1.0
25.9
26.9
7.6
–
3.3
39.9
581.1
117.9
124.8
0.1%
1.0%
0.5%
301.5
459.9
16.5
3.7
1,605.4
8.9%
1.7%
0.0%
89.2%
2.5%
Individual
provision
£million
Collective
provision
£million
Total
Gross loans
provision
£million
and receivables
£million
Provision
cover
%
–
0.4
0.4
3.5
0.6
10.0
10.6
4.0
3.5
22.4
0.5
0.1
0.1
0.7
–
1.6
1.6
0.9
1.4
5.3
0.5
0.5
0.5
4.2
0.6
11.6
12.2
4.9
4.9
27.7
451.5
117.7
63.3
69.7
248.4
330.8
35.5
1,316.9
0.1%
0.4%
0.8%
6.0%
4.9%
1.5%
13.8%
2.1%
Strategic Report
Corporate Governance Report
Financial Statements
12. Allowances for impairment of loans and advances continued
The Company net impairment losses included in the income statement can be analysed as follows:
Individual provision: Charge for impairment losses
Collective provision: Charge for impairment losses
Loans written off, net of amounts utilised
Recoveries of loans written off
Profit on sale of debt
Less Personal Lending
A reconciliation of the allowance accounts for losses on loans and advances is as follows:
Individual allowances for impairment
At 1 January
Charge for impairment losses
Utilised
Release of allowance for impairment on the sale of debt
Sale of Personal Lending
At 31 December
Collective allowances for impairment
At 1 January
Charge for impairment losses
Sale of Personal Lending
At 31 December
Total allowances for impairment
Loans and advances to customers can be further summarised as follows:
2017
%
95.3%
0.3%
0.0%
2.3%
2.1%
100.0%
2017
£million
1,529.0
5.4
–
37.5
33.5
1,605.4
(39.9)
1,565.5
Neither past due nor impaired
Not past due but impaired
Past due but not impaired
Past due up to 90 days and impaired
Past due after 90 days and impaired
Gross
Less: allowance for impairment
Net
www.securetrustbank.co.uk
2017
£million
2016
£million
38.8
(0.4)
1.4
(0.5)
(0.3)
39.0
(3.4)
35.6
21.4
3.2
0.9
(0.3)
(1.0)
24.2
(4.4)
19.8
2017
£million
2016
£million
22.4
38.8
(13.5)
(5.3)
(6.9)
35.5
5.3
(0.4)
(0.5)
4.4
39.9
2016
£million
1,250.2
0.6
12.4
37.2
16.5
1,316.9
(27.7)
1,289.2
18.5
25.8
(8.5)
(13.4)
–
22.4
2.0
3.3
–
5.3
27.7
2016
%
95.0%
0.0%
0.9%
2.8%
1.3%
100.0%
137
Secure Trust Bank PLC Annual Report & Accounts 2017
Straightforward transparent banking
Notes to the consolidated financial statements
continued
12. Allowances for impairment of loans and advances continued
Gross amounts of loans and advances to customers that were past due up to 90 days and impaired were as follows:
Past due up to 30 days
Past due 30 – 60 days
Past due 60 – 90 days
Total
2017
£million
24.4
8.5
4.6
37.5
2016
£million
24.2
7.9
5.1
37.2
During the period, the methodology used to derive the above analyses of loans and advances to customers, categorising
them into past due banding, was enhanced. Accordingly, the comparatives as at 31 December 2016 have been re-presented
on this basis.
Gross amounts of loans and advances to customers that were past due but not impaired were as follows:
Past due up to 30 days
Past due 30 – 60 days
Total
2017
£million
–
–
–
2016
£million
4.6
7.8
12.4
The impairment provision calculation is based on the individual past-due status of each loan.
Group and Company
Interest income on loans classified as impaired totalled £2.6 million (2016: £6.4 million).
13. Debt securities held-to-maturity
Debt securities of £5.0 million (2016: £20.0 million) represent UK Treasury Bills. The Company’s intention is to hold them
to maturity and, therefore, they are stated in the statement of financial position at amortised cost.
All of the debt securities held-to-maturity had a rating agency designation at 31 December 2017, based on Moody’s
long-term ratings of Aa2 (2016: Aa1. Moody’s downgraded the UK credit rating in September 2017). None of the debt
securities held-to-maturity are either past due or impaired.
14. Equity instruments available-for-sale
On 13 April 2016, as part of the sale of ELG to NSF, the Group acquired 23,529,412 shares in NSF at a cost of 69.25 pence per
share. This equity instrument was considered to be available-for-sale, and therefore fair value changes on the available-for-sale
securities were recognised directly in other comprehensive income and equity (‘AFS’ reserve).
In May 2017, the shares were sold at an average price of 71 pence, realizing a profit of £343,000. The AFS reserve balance of
£2.8 million, which had arisen due to previous movements in the NSF share price, was reclassified from other comprehensive
income to the income statement.
138
Strategic Report
Corporate Governance Report
Financial Statements
Freehold
land and
buildings
£million
Computer
and other
equipment
£million
Total
£million
7.1
1.4
–
0.5
9.0
–
9.0
(0.6)
(0.1)
–
0.7
–
(0.1)
0.1
–
9.0
9.0
10.1
1.1
(0.3)
–
10.9
0.8
11.7
(8.1)
(0.5)
0.1
–
(8.5)
(0.7)
–
(9.2)
2.4
2.5
17.2
2.5
(0.3)
0.5
19.9
0.8
20.7
(8.7)
(0.6)
0.1
0.7
(8.5)
(0.8)
0.1
(9.2)
11.4
11.5
15. Property, plant and equipment
Group
Cost or valuation
At 1 January 2016
Additions
Disposals
Revaluation
At 31 December 2016
Additions
At 31 December 2017
Accumulated depreciation
At 1 January 2016
Depreciation charge
Disposals
Revaluation
At 31 December 2016
Depreciation charge
Revaluation
At 31 December 2017
Net book amount
At 31 December 2016
At 31 December 2017
www.securetrustbank.co.uk
139
Secure Trust Bank PLC Annual Report & Accounts 2017
Straightforward transparent banking
Notes to the consolidated financial statements
continued
15. Property, plant and equipment continued
Company
Cost or valuation
At 1 January 2016
Additions
Disposals
Revaluation
At 31 December 2016
Additions
At 31 December 2017
Accumulated depreciation
At 1 January 2016
Depreciation charge
Disposals
Revaluation
At 31 December 2016
Depreciation charge
At 31 December 2017
Net book amount
At 31 December 2016
At 31 December 2017
Freehold
property
£million
Computer
and other
equipment
£million
Total
£million
2.7
1.4
–
0.5
4.6
–
4.6
–
(0.1)
–
0.1
–
–
–
–
4.6
4.6
9.5
0.6
(0.3)
–
9.8
0.3
10.1
(8.0)
(0.3)
0.1
–
(8.2)
(0.4)
(8.6)
1.6
1.5
12.2
2.0
(0.3)
0.5
14.4
0.3
14.7
(8.0)
(0.4)
0.1
0.1
(8.2)
(0.4)
(8.6)
6.2
6.1
The Group’s freehold properties comprise:
• the Registered Office of the Company, which is fully utilised for the Group’s own purposes;
• Secure Trust House, Boston Drive, Bourne End, SL8 5YS, the majority of which up to the sale of ELG, was also used for the
Group’s own purposes. Since the sale, it is only partially used for the Group’s own purposes; and
• 25 and 26 Neptune Court, Vanguard Way, Cardiff, CF24 5PJ, the majority of which is used for the Group’s own purposes.
The directors have assessed the value of the Group’s freehold property at the year end through comparison to current rental
yields on similar properties in the same area and an increase in the fair value of freehold property has been recognised and
its carrying value has been adjusted accordingly. Changes in the fair value of freehold property are recognised in other
comprehensive income, to the extent that any reductions do not exceed the initial increase.
The carrying value of freehold land which is included in the total carrying value of freehold land and buildings and which
is not depreciated is £1.9 million (2016: £1.9 million).
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Financial Statements
Group
2017
£million
Group
2016
£million
Company
2017
£million
Company
2016
£million
7.9
(1.5)
6.4
7.9
(1.4)
6.5
4.1
(0.1)
4.0
4.1
(0.1)
4.0
Goodwill
£million
Computer
software
£million
Other
intangible
assets
£million
Total
£million
1.0
–
1.0
–
1.0
–
–
–
–
–
1.0
1.0
9.3
3.6
12.9
3.3
16.2
(4.8)
(1.3)
(6.1)
(1.8)
(7.9)
6.8
8.3
2.2
–
2.2
0.1
2.3
(0.7)
(0.3)
(1.0)
(0.2)
(1.2)
1.2
1.1
12.5
3.6
16.1
3.4
19.5
(5.5)
(1.6)
(7.1)
(2.0)
(9.1)
9.0
10.4
15. Property, plant and equipment continued
The historical cost of freehold property included at valuation is as follows:
Cost
Accumulated depreciation
16. Intangible assets
Group
Cost or valuation
At 1 January 2016
Additions
At 31 December 2016
Additions
At 31 December 2017
Accumulated amortisation
At 1 January 2016
Amortisation charge
At 31 December 2016
Amortisation charge
At 31 December 2017
Net book amount
At 31 December 2016
At 31 December 2017
Goodwill above relates to the following cash generating units, which are part of the Retail Finance operating segment:
Music business
V12
Total
www.securetrustbank.co.uk
2017
£million
0.3
0.7
1.0
2016
£million
0.3
0.7
1.0
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Straightforward transparent banking
Notes to the consolidated financial statements
continued
16. Intangible assets continued
The recoverable amount of these cash generating units are determined on a value in use calculation which uses cash flow
projections based on financial forecasts covering a three year period, and a discount rate of 8%. Cash flow projections during
the forecast period are based on the expected rate of new business. A zero growth based scenario is also considered.
The directors believe that any reasonably possible change in the key assumptions on which recoverable amount is based
would not cause the aggregate carrying amount to exceed the aggregate recoverable amount of the cash-generating unit.
Other intangible assets were recognised as part of the V12 Finance Group acquisition. These were recorded at fair value,
and are being amortised as follows:
IT system
Distribution channel
Brand name
Company
Cost or valuation
At 1 January 2016
Additions
At 31 December 2016
Additions
At 31 December 2017
Accumulated amortisation
At 1 January 2016
Amortisation charge
At 31 December 2016
Amortisation charge
At 31 December 2017
Net book amount
At 31 December 2016
At 31 December 2017
Years
5
10
5
Goodwill
£million
Computer
software
£million
Total
£million
0.3
–
0.3
–
0.3
–
–
–
–
–
0.3
0.3
5.5
3.5
9.0
3.3
5.8
3.5
9.3
3.3
12.3
12.6
(2.6)
(0.5)
(3.1)
(1.0)
(4.1)
5.9
8.2
(2.6)
(0.5)
(3.1)
(1.0)
(4.1)
6.2
8.5
Goodwill above relates to the music business cash generating unit, which is part of the Retail Finance operating segment.
The recoverable amount is determined on the same basis as for the Group.
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17. Investments
Company
Shares
at cost
£million
Impairment
provisions
£million
Net
investments
£million
At 31 December 2016, 1 January 2017 and 31 December 2017
3.7
–
3.7
Shares in subsidiary undertakings of Secure Trust Bank PLC at 31 December 2017 are stated at cost less any provision for
impairment. All subsidiary undertakings are unlisted and none are banking institutions. The subsidiary undertakings were all
incorporated in the UK and wholly owned via ordinary shares. All subsidiary undertakings are included in the consolidated
financial statements and have an accounting reference date of 31 December.
Details are as follows:
Owned directly
Debt Managers (Services) Limited
Secure Homes Services Limited
STB Leasing Limited
V12 Finance Group Limited
Principal activity
Debt collection company
Property rental
Leasing
Holding company
Owned indirectly via intermediate holding companies
V12 Personal Finance Limited
V12 Retail Finance Limited
Dormant
Sourcing and servicing of unsecured loans
The registered office of the Company, and all subsidiary undertakings, is One Arleston Way, Shirley, Solihull, West Midlands,
B90 4LH.
The following subsidiaries were sold to NSF on 13 April 2016:
Principal activity
Owned directly
Everyday Loans Holdings Limited
Holding company
Owned indirectly via intermediate holding companies
Everyday Loans Limited
Everyday Lending Limited
Sourcing and servicing of unsecured and secured loans
Provider of unsecured and secured loans
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Notes to the consolidated financial statements
continued
18. Deferred taxation
Deferred tax liabilities:
Unrealised surplus on revaluation of freehold property
Other short term timing differences
Deferred tax liabilities
Deferred tax assets:
Other short term timing differences
Deferred tax assets
Deferred tax liabilities:
At 1 January
Income statement
Other comprehensive income
At 31 December
Deferred tax assets:
At 1 January
Income statement
Other comprehensive income
At 31 December
Group
2017
£million
Group
2016
£million
Company
2017
£million
Company
2016
£million
(0.2)
0.2
–
0.6
0.6
(0.2)
0.2
–
–
–
0.2
0.4
0.6
(0.2)
–
(0.2)
–
–
–
–
(0.2)
(0.2)
0.3
(0.3)
–
–
–
–
–
0.6
0.6
–
–
–
–
0.1
0.1
0.4
0.6
–
–
–
0.1
0.1
–
–
–
–
0.6
(0.4)
(0.1)
0.1
On 26 October 2015, the Government substantively enacted a reduction in the main rate of UK corporation tax from 20% to
19% (effective from 1 April 2017). Subsequently, a further reduction to 17% (effective 1 April 2020) was also substantively
enacted on 6 September 2016. This will reduce the Company’s future current tax charge accordingly. Deferred tax has been
calculated based on the enacted rates to the extent that the related temporary or timing differences are expected to reverse
in the future periods.
Group
2017
£million
Group
2016
£million
Company
2017
£million
Company
2016
£million
1.2
–
4.2
5.4
0.7
–
4.2
4.9
1.0
29.7
2.5
33.2
0.6
31.2
3.5
35.3
19. Other assets
Other receivables
Amounts due from related companies
Prepayments and accrued income
144
Strategic Report
Corporate Governance Report
Financial Statements
20. Due to banks
Group
2017
£million
Group
2016
£million
Company
2017
£million
Company
2016
£million
Amounts due to other credit institutions
113.0
70.0
113.0
70.0
Amounts due to banks for the current year represent monies arising from drawings under the Term Funding Scheme. These
are due for repayment between May 2021 and November 2021.
Amounts due to banks in the prior year represented monies arising from the sale and repurchase of drawings under the
Funding for Lending Scheme, which were repaid during 2017.
21. Deposits from customers
Group and Company
Current/demand accounts
Term deposits
For a maturity profile of deposits from customers, refer to Notes 30 and 32.
22. Other liabilities
Other payables
Amounts due to related companies
Accruals and deferred income
2017
£million
14.5
1,468.7
1,483.2
2016
£million
15.2
1,136.6
1,151.8
Group
2017
£million
Group
2016
£million
Company
2017
£million
Company
2016
£million
29.5
–
12.4
41.9
21.2
–
27.8
49.0
24.5
9.7
10.2
44.4
17.5
13.2
26.3
57.0
Financial Services Compensation Scheme Levy
The liability for the Financial Services Compensation Scheme levy is included in accruals and deferred income of both Group
and Company.
In common with all regulated UK deposit takers, the Company pays a levy to the Financial Services Compensation Scheme to
enable it to meet claims against it. The levy consists of a compensation levy which covers the amount of compensation and a
management expenses levy, which covers the costs of running the scheme and interest associated with compensation which
the scheme pays.
The Company’s Financial Services Compensation Scheme provision reflects market participation up to the reporting date
and the accrual of £0.2 million (2016: £0.3 million) relates to the levy for the scheme year 2017/18 which is payable in
September 2018. This amount was calculated on the basis of the Company’s share of protected deposits and the Financial
Services Compensation Scheme’s estimate of total interest levies payable for each scheme year.
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Straightforward transparent banking
Notes to the consolidated financial statements
continued
23. Provisions for liabilities and charges
Balance at 1 January
Charged to income statement
Utilised
Balance at 31 December
2017
Customer
redress
£million
1.3
0.4
(0.5)
1.2
2017
Fraud
£million
2017
Total
£million
2016
Customer
redress
£million
–
0.2
–
0.2
1.3
0.6
(0.5)
1.4
2.0
0.4
(1.1)
1.3
Customer redress provision
The Group provides for its best estimate of redress payable in respect of historical sales of accident, sickness and
unemployment insurance, by considering the likely future uphold rate for claims, in the context of confirmed issues and
historical experience. The likelihood of potential new claims is projected forward to 2019, as management believe this to be
an appropriate time horizon, recognising the significant decline in recent claims experience and the increasing subjectivity
beyond that. The accuracy of these estimates would be affected, were there to be a significant change in either the number
of future claims or, the incidence of claims upheld by the Financial Ombudsman Service.
The Financial Conduct Authority has announced a deadline for making these customer redress claims, which would give
consumers until 29 August 2019 to make a claim.
Fraud
The fraud provision relates to cases where the Bank has reasonable evidence of suspected fraud, but further investigation
is required before the cases can be dealt with appropriately.
24. Contingent liabilities and commitments
Contingent liabilities
As a financial services business, the Group must comply with numerous laws and regulations, which significantly affect the
way it does business. Whilst the Group believes there are no material unidentified areas of failure to comply with these laws
and regulations, there can be no guarantee that all issues have been identified.
Capital commitments
At 31 December 2017, the Group had no capital commitments (2016: £nil).
The Company had no capital commitments (2016: £nil).
Credit commitments
See Note 29 for details of the Group and Company commitments to extend credit to customers.
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Financial Statements
24. Contingent liabilities and commitments continued
Operating lease commitments
The future aggregate lease payments for non-cancellable operating leases are as follows:
Group
Within 1 year
Between 1 year and 5 years
Over 5 years
Company
Within 1 year
Between 1 year and 5 years
Over 5 years
2017
Land and
buildings
£million
2017
Other
£million
2016
Land and
buildings
£million
2016
Other
£million
0.3
0.8
–
1.1
0.1
0.1
–
0.2
0.3
0.9
0.1
1.3
0.4
0.1
–
0.5
2017
Land and
buildings
£million
2017
Other
£million
2016
Land and
buildings
£million
2016
Other
£million
0.1
0.4
–
0.5
0.1
–
–
0.1
0.1
0.4
0.1
0.6
0.3
0.1
–
0.4
There are two leases classified as land and buildings in the Group (2016: four). Other leases include motor vehicles and
computer hardware.
25. Share capital
At start of year
Shares issued during the year
At end of year
2017
Ordinary
shares
£million
2016
Number of
share
2016
Ordinary
shares
£million
2017
Number of
shares
18,475,229
–
7.4
–
18,191,894
283,335
7.3
0.1
7.4
18,475,229
7.4
18,475,229
Share capital comprises ordinary shares with a par value of 40 pence each.
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Secure Trust Bank PLC Annual Report & Accounts 2017
Straightforward transparent banking
Notes to the consolidated financial statements
continued
26. Share based payments
At 31 December 2017, the Group had four share based payment schemes in operation:
• Share Option Scheme;
• 2017 Long Term Incentive Plan;
• 2017 Sharesave Scheme; and
• ‘Phantom’ Share Option Scheme.
In addition, the 2017 deferred bonus plan has been approved by shareholders but has not yet been launched.
A summary of the key details of each scheme is set out below:
Outstanding
at the start of
the year
Number
Granted
during
the year
Number
Forfeited
during
the year
Number
Outstanding
at the end of
the year
Number
Vested and
exercisable
Number
Vesting
Date
Exercise
price
£
177,084
–
–
177,084
177,084
2 November 2016
7.20
–
–
67,992
125,987
177,084
193,979
–
(40)
(40)
67,992
125,947
–
–
1 June 2020
1 November 2020
0.40
13.19
371,023
177,084
312,917
–
–
312,917
–
16 March 2019
25.00
Equity settled
Share Option Scheme
2017 Long Term Incentive
Plan
2017 Sharesave Plan
Cash settled
‘Phantom’ Share Option
Scheme
The Group and Company incurred an expense in relation to share based payments of £0.2 million (2016: credit of £0.5 million),
as disclosed in Note 5.
Share Option Scheme
On 17 October 2011, the Group established the Share Option Scheme entitling three directors and certain senior employees
to purchase shares in the Company.
On 2 November 2011, 934,998 share options were granted at an exercise price of £7.20 per share. Approximately half of the
share options vested and were exercised on 2 November 2014, with the remainder vesting and becoming exercisable on
2 November 2016. The bulk of the remainder were exercised on 7 November 2016, leaving 177,084 share options of two
directors unexercised at 31 December 2016. Vested options are exercisable for a period of 10 years from the date of grant.
The number of unexercised share options as at 31 December 2017 remains unchanged from the position as at
31 December 2016. The intrinsic value of unexercised options is £1.8 million (2016: £2.5 million).
148
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Corporate Governance Report
Financial Statements
26. Share based payments continued
2017 Long Term Incentive Plan
On 3 May 2017, the Group established the 2017 Long Term Incentive Plan Scheme entitling two directors and certain other
key senior employees to purchase shares in the Company.
The awards are subject to three performance conditions, which are based on:
• Annual compound growth in earnings per share (‘EPS’) over the performance period;
• Rank of the total shareholder return (‘TSR’) over the performance period against the TSR of the comparator group of peer
group companies; and
• Maintaining appropriate risk practices over the performance period reflecting the longer term strategic risk management
of the Group.
The awards will vest on the date on which the board determines that these conditions have been met.
The awards have a performance term of three years. Those awards granted to the Executive Directors are subject to a holding
period of two years following the vesting date. Those awards not subject to a holding period will be released to the
participants on the vesting date. Vested options are exercisable for a period of 10 years from the date of grant.
On 1 June 2017, 67,992 share options were granted at an exercise price of 40 pence per share. 33,467 share options are
subject to a holding period of two years, whilst the remaining 34,525 share options are not subject to a holding period.
The original grant date valuation was determined to be £12.19 for those awards that are subject to a holding period, and
£14.82 for those awards not subject to a holding period, using a Black-Scholes model for the EPS and risk management
tranches, and a Monte Carlo model for the TSR tranche, and these valuations have been used in the calculation.
Measurement inputs and assumptions used were as follows:
Share price at grant date
Expected dividend yield
Awards subject to a holding period
Expected stock price volatility
Risk free interest rate
Average expected life (years)
Discount for lack of marketability during holding period
Awards not subject to a holding period
Expected stock price volatility
Risk free interest rate
Average expected life (years)
Assumptions applicable to TSR tranche only
Expected stock price volatility
Grant date TSR performance of the Company compared to comparator group
Correlation
At grant date
£22.45
3.80%
24.6%
0.42%
5.00
10.00%
25.1%
0.19%
3.00
25.50%
Below median
37%
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Straightforward transparent banking
Notes to the consolidated financial statements
continued
26. Share based payments continued
2017 Sharesave Plan
On 3 May 2017, the Group established the 2017 Sharesave Plan, entitling all eligible employees to purchase shares in
the Company.
The 2017 Sharesave Plan allows employees with more than 12 months service to save for three years, subject to a maximum
monthly amount of £500, with the option to buy shares in Secure Trust Bank PLC when the plan matures. Participants can
not change the amount that they have agreed to save each month but they can suspend payments for up to six months.
Participants can withdraw their savings at any time but, if they do this before the completion date, they lose the option to
buy shares at the Option Price, and if participants cease to hold plan-related employment before the third anniversary of
the grant date, then the options are also lost.
On 20 September 2017, 229 employees were granted 125,987 share options, at an exercise price of £13.19. The options
will ordinarily vest on 1 November 2020 and be exercisable for a period of six months. At 31 December 2017, 228 employees
with 125,947 share options remained in the 2017 Sharesave Plan.
The original grant date valuation was determined to be £3.53 per option, using a Black-Scholes model, and this valuation
has been used in the calculation. Measurement inputs and assumptions used were as follows:
Share price at grant date
Expected stock price volatility
Expected dividend yield
Risk free interest rate
Average expected life (years)
Expected cancellation rate
At grant date
£17.51
25.55%
4.34%
0.58%
3.36
8.00%
Cash settled share based payments
On 16 March 2015, a four year ‘phantom’ share option scheme was established in order to provide effective long-term
incentive to senior management of the Group. Under the scheme, no actual shares would be issued by the Company, but
those granted awards under the scheme would be entitled to a cash payment. The amount of the award is calculated by
reference to the increase in the value of an ordinary share in the Company over an initial value set at £25 per ordinary share,
being the price at which the shares resulting from the exercise of the first tranche of share options under the Share Option
Scheme were sold in November 2014.
As at 31 December 2017, 312,917 (2016: 312,917) share options remained outstanding. The options will vest on
16 March 2019, and be exercisable for a period of 10 years after grant date.
As at 31 December 2017, the estimated fair value has been prepared using the Black-Scholes model. Measurement inputs
and assumptions used were as follows:
Share price at reporting date
Expected stock price volatility
Expected dividend yield
Risk free interest rate
Average expected life (years)
Fair value
150
2017
2016
£17.97
24.49%
4.45%
0.59%
4.03
£0.79
£21.51
40.00%
3.40%
0.06%
1.84
£2.80
Strategic Report
Corporate Governance Report
Financial Statements
2017
£million
2016
£million
0.6
(0.4)
0.2
1.2
(0.6)
0.6
26. Share based payments continued
This resulted in the following being recognised in the financial statements:
Liability at 1 January
Credit for the year
Liability at 31 December
27. Cash and cash equivalents
For the purposes of the statement of cash flows, cash and cash equivalents comprise the following balances with less than
three months’ maturity from the date of acquisition.
Cash and balances at central banks
Loans and advances to banks (Note 9)
28. Financial risk management strategy
Group
2017
£million
226.1
34.3
260.4
Group
2016
£million
Company
2017
£million
Company
2016
£million
112.0
18.2
130.2
226.1
32.3
258.4
112.0
16.5
128.5
By their nature, the Group’s activities are principally related to the use of financial instruments. The directors and senior
management of the Group have formally adopted a Group risk appetite statement which sets out the Board’s attitude to risk
and internal controls. Key risks identified by the directors are formally reviewed and assessed at least once a year by the
Board, in addition to which key business risks are identified, evaluated and managed by operating management on an
ongoing basis by means of procedures such as physical controls, credit and other authorisation limits and segregation of
duties. The Board also receives regular reports on any risk matters that need to be brought to its attention. Significant risks
identified in connection with the development of new activities are subject to consideration by the Board. There are
budgeting procedures in place and reports are presented regularly to the Board detailing the results of each principal
business unit, variances against budget and prior year, and other performance data.
A more detailed description of the risk governance structure is contained in the Strategic Report beginning on page 2.
The principal financial risks inherent in the Group’s business are credit risk (Note 29), market risk (Note 30), liquidity risk
(Note 31), and capital risk (Note 32).
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Notes to the consolidated financial statements
continued
29. Credit risk
The Company and Group take on exposure to credit risk, which is the risk that a counterparty will be unable to pay amounts
in full when due. A formal Credit Risk Policy has been agreed by the Board whilst credit risk is monitored on a monthly basis
by the Credit Risk Committees which review performance of key portfolios including new business volumes, collections
performance, provisioning levels and provisioning methodology. A credit risk department within the Group monitors
adherence to the Credit Risk Policy, implements risk tools to manage credit risk and evaluates business opportunities and the
risks and opportunities they present to the Group whilst ensuring the performance of the Group’s existing portfolios is in line
with expectations.
The Group structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to
individual borrowers or groups of borrowers. Such risks are monitored on a revolving basis and subject to an annual or more
frequent review. The limits on the level of credit risk are approved periodically by the Board of Directors and actual exposures
against limits monitored daily.
Impairment provisions are provided for losses that have been incurred at the statement of financial position date.
Significant changes in the economy could result in losses that are different from those provided for at the statement of
financial position date. Management therefore carefully manages its exposures to credit risk as they consider this to be
the most significant risk to the business.
Exposure to Consumer Finance credit risk is managed through regular analysis of the ability of borrowers and potential
borrowers to meet interest and capital repayment obligations and by changing these lending limits where appropriate.
Exposure to credit risk is also managed in part by obtaining collateral, principally motor vehicles on Motor loans and a credit
support balance provided by RentSmart. The assets undergo a scoring process to mitigate risk and are monitored by the Board.
For Real Estate Finance and Commercial Finance, lending decisions are made on an individual transaction basis, using expert
judgement and assessment against criteria set out in the lending policies. Asset Finance lending is outsourced to Haydock,
who operate in line with the Group’s credit policies and risk appetite. The loans are secured against the assets lent against
(real estate, trade receivables and commercial plant and equipment, respectively). Disclosures relating to collateral and
arrears on loans and advances to customers are disclosed in Notes 10 and 12 respectively.
The Board monitors the ratings of the counterparties in relation to the Group’s loans and advances to banks. Disclosures of
these at the year end are contained in Note 9. There is no direct exposure to the Eurozone and peripheral Eurozone
countries.
The maximum exposure to credit risk for the Company and the Group was as follows:
Cash and balances at central banks
Loans and advances to banks
Loan and advances to customers
Debt securities held-to-maturity
Other receivables
Amounts due from related parties
Group
2017
£million
Group
2016
£million
Company
2017
£million
Company
2016
£million
226.1
34.3
1,598.3
5.0
1.2
–
112.0
18.2
1,321.0
20.0
0.7
–
226.1
32.3
1,565.5
5.0
1.0
29.7
112.0
16.5
1,289.2
20.0
0.6
31.2
Credit risk exposures relating to off-balance sheet assets are
as follows:
Loan commitments
178.6
178.0
178.5
177.8
At 31 December
2,043.5
1,649.9
2,038.1
1,647.3
The above table represents the maximum credit risk exposure (net of impairment) to the Company and Group at
31 December 2017 and 2016 without taking account of any collateral held or other credit enhancements attached.
For on-balance sheet assets, the exposures are based on the net carrying amounts as reported in the statement of
financial position.
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Financial Statements
29. Credit risk continued
Concentration risk
Management assesses the potential concentration risk from geographic, product and individual loan concentration. Due to
the well diversified nature of the Group’s lending operations the directors do not consider there to be a material exposure
arising from concentration risk. The increase in lending balances and loan commitments in the London region is principally
due to the increase in Real Estate Finance activities during the year. The concentration by product and location of the Group
and Company’s lending to customers and loan commitments are detailed below:
Group
Concentration by product:
Business Finance:
Real Estate Finance
Asset Finance
Commercial Finance
Consumer Finance:
Personal Lending
Motor
Retail
Consumer Mortgages
Other
At 31 December
Concentration by region:
East Anglia
East Midlands
London
North East
North West
Northern Ireland
Scotland
South East
South West
Wales
West Midlands
Yorkshire and the Humber
Overseas
At 31 December
Loans and advances
to customers
Loan commitments
2017
£million
2016
£million
2017
£million
2016
£million
580.8
116.7
126.5
–
274.6
452.3
16.5
30.9
451.0
117.2
62.8
65.5
236.2
325.9
–
62.4
98.6
15.5
35.5
–
0.6
20.1
7.7
0.6
99.4
19.5
28.9
–
0.6
28.6
–
1.0
1,598.3
1,321.0
178.6
178.0
142.0
61.5
528.0
44.5
152.0
16.8
93.0
231.2
74.0
53.5
93.1
88.1
20.6
113.1
52.3
415.3
37.4
120.8
12.5
90.3
205.0
62.6
46.8
80.5
69.1
15.3
25.4
4.0
76.6
1.0
25.4
0.5
3.7
14.3
8.1
1.8
6.1
4.5
7.2
19.7
3.0
61.3
2.2
17.0
0.4
10.6
35.0
12.1
4.2
5.5
3.9
3.1
1,598.3
1,321.0
178.6
178.0
The above table relates to the location of the borrower. The majority of the overseas borrowers are Real Estate Finance
clients. All of the property secured against Real Estate Finance loans is based in the United Kingdom.
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153
Secure Trust Bank PLC Annual Report & Accounts 2017
Straightforward transparent banking
Notes to the consolidated financial statements
continued
29. Credit risk continued
Company
Concentration by product:
Business Finance:
Real Estate Finance
Asset Finance
Commercial Finance
Consumer Finance:
Personal Lending
Motor
Retail
Consumer Mortgages
Other
At 31 December
Concentration by region:
East Anglia
East Midlands
London
North East
North West
Northern Ireland
Scotland
South East
South West
Wales
West Midlands
Yorkshire and the Humber
Overseas
At 31 December
Loans and advances
to customers
Loan commitments
2017
£million
2016
£million
2017
£million
2016
£million
580.8
116.7
124.2
–
274.6
452.3
16.5
0.4
451.0
117.2
62.8
65.5
236.2
325.9
–
30.6
98.6
15.5
35.5
–
0.6
20.1
7.7
0.5
99.4
19.5
28.9
–
0.6
28.6
–
0.8
1,565.5
1,289.2
178.5
177.8
139.3
59.6
523.8
43.0
146.1
16.2
90.1
227.1
71.8
51.9
90.4
85.6
20.6
110.4
50.1
411.2
35.9
117.1
11.9
87.1
200.6
60.3
45.1
77.8
66.4
15.3
25.4
4.0
76.6
1.0
25.4
0.5
3.7
14.3
8.1
1.8
6.0
4.5
7.2
19.7
3.0
61.1
2.2
17.0
0.4
10.6
35.0
12.1
4.2
5.5
3.9
3.1
1,565.5
1,289.2
178.5
177.8
The above table relates to the location of the borrower. The majority of the overseas borrowers are Real Estate Finance
clients. All of the property secured against Real Estate Finance loans is based in the United Kingdom.
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Financial Statements
29. Credit risk continued
Forbearance
At year end, all customers within the Group’s Consumer Mortgage business were up to date with their monthly payments.
Should customers face financial difficulties, the Group may, depending on individual circumstances, offer customers one
of a number of forbearance options. The types of forbearance the Group may be prepared to offer include the following:
• Temporary interest only concessions are offered to customers in financial difficulty on a temporary basis with formal
periodic review. The concession allows the customer to reduce monthly payments to cover interest only, and if made,
the arrears status will not increase;
• Arrangement payment plans are agreed to enable customers to reduce their arrears balances by an agreed amount
per month which is paid in addition to their standard monthly repayment;
• Payment concessions can be agreed on a temporary basis whereby the customer may pay less than the contractual
monthly payment, in line with their individual affordability. If a customer is within this type of concession, their arrears
position will increase; and
• In exceptional circumstances, capitalisations of arrears may occur or an interest rate adjustment may be applied.
These are used under strict controls, explicitly where the customer circumstances offer no other option.
All forbearance arrangements are formally discussed and agreed with the customer. By offering customers in financial
difficulty the option of forbearance the Group potentially exposes itself to an increased level of risk through prolonging
the period of non-contractual payment and/or potentially placing the customer into a detrimental position at the end
of the forbearance period.
All forbearance arrangements are reviewed and monitored regularly to assess the ongoing potential risk, suitability and
sustainability to the Group.
Where forbearance measures are not possible or are considered not to be in the customer’s best interests, or where such
measures have been tried and the customer has not adhered to the forbearance terms that have been agreed, the Bank will
consider realising its security and taking possession of the property in order to sell it and clear the outstanding debt.
Other than Consumer Mortgages, the Group does not routinely reschedule contractual arrangements where customers
default on their repayments. It may offer the customer the option to reduce or defer payments for a short period, in which
cases the loan will retain the normal contractual payment due dates and will be treated the same as any other defaulting
cases for impairment purposes. Arrears tracking will continue on the account with any impairment charge being based
on the original contractual due dates for all products.
Implementation of IFRS 9
As detailed in note 1.2 the estimated adjustment (net of tax) of the adoption of IFRS 9 on the opening balance of the Group’s
equity at 1 January 2018 is expected to be a reduction in the range of £22 million to £27 million. This represents:
• £nil related to the classification requirements (refer to (a) below for further information);
• An expected reduction in the range of £28 million to £34 million related to the impairment requirements (refer to (b) below
for further information). This reduction is primarily attributable to Consumer Finance. The Business Finance portfolio is not
expected to drive a material reduction; and
• An increase in the range of £6 million to £7 million related to associated deferred tax impacts.
The above are estimates and will not be finalised until all transition work has been completed.
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155
Secure Trust Bank PLC Annual Report & Accounts 2017
Straightforward transparent banking
Notes to the consolidated financial statements
continued
29. Credit risk continued
a) Classification of financial instruments
IFRS 9 contains three primary measurement categories for financial assets; ‘amortised cost’, ‘fair value through other
comprehensive income (FVOCI)’ and ‘fair value through profit and loss (FVTPL)’. The IAS 39 categories ‘held-to-maturity’,
‘available-for-sale’ and ‘loans and receivables’ will be eliminated. A financial asset will be measured at amortised cost if both
the following conditions are met and it has not been designated as at FVTPL:
• the asset is held within a business model whose objective is to hold the asset to collect its contractual cash flows; and
• the contractual terms of the financial asset give rise to cash flows on specified dates that represent payments of solely
principal and interest on the outstanding principal amount.
A debt instrument would be measured at FVOCI only if both the below conditions are met and it has not been designated
as FVTPL:
• the asset is held within a business model whose objective is achieved by both collecting its contractual cash flows and
selling the financial asset; and
• the contractual terms of the financial asset give rise to cash flows on specified dates that represent payments of solely
principal and interest on the outstanding principal amount.
On initial recognition of an equity investment that is not held for trading, the Group may irrevocably elect to present
subsequent changes in fair value in OCI. This election will be made on an investment by investment basis.
All other assets will be classified as FVTPL.
Impact assessment
As detailed below IFRS 9 will have minimal impact on the classification of financial assets held as at 1 January 2018:
• The Group’s cash and balances at central banks, loans and advances to banks and customers, debt securities
held-to-maturity and other financial assets will be classified as amortised cost. This is consistent with their current
IAS 39 classification; and
• The Group held no financial instruments that would be classified as FVOCI or FVTPL at 1 January 2018.
b) Impairment of financial assets and loan commitments
IFRS 9 replaces the incurred loss impairment model within IAS 39 with a forward looking expected loss model. The Group
will recognise loss allowances for expected credit losses on all financial assets carried at amortised cost, including lease
receivables and loan commitments.
Credit loss allowances will be measured as an amount equal to lifetime ECL, except for the following, for which they will be
measured as 12 month ECL:
• Financial assets determined to have low credit risk at the reporting date;
• Financial assets which have not experienced a significant increase in credit risk since their initial recognition; and
• Financial assets which have experienced a significant increase in credit risk since their initial recognition but have
subsequently met the Group’s cure policy, as set out below.
A financial asset will be considered to have low credit risk when its credit risk rating is equivalent to the widely understood
definition of ‘investment grade’ assets. The Group expects all its debt securities, which represent UK Treasury bills, and loans
held in STB Leasing Limited, for which credit risk is retained by its partner RentSmart, to be low credit risk.
Lifetime ECL is the ECL that results from all possible default events over the expected life of a financial asset. Further detail
regarding the measurement of ECL is set out below.
12 month ECL is the portion of lifetime ECL that results from default events on a financial asset that are expected within
12 months after the reporting date.
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Financial Statements
29. Credit risk continued
Measurement of ECL
ECL’s are probability weighted estimates of credit losses which will be measured as the present value of all cash shortfalls.
Specifically, this is the difference between the contractual cash flows due and the cash flows expected to be received,
discounted at the original effective interest rate (or for portfolios purchased outside of the Group by Debt Managers
(Services) Limited the credit adjusted effective interest rate). For undrawn loan commitments ECL will be measured as the
difference between the contractual cash flows due if the commitment is drawn and the cash flows expected to be received.
Significant increase in credit risk
For Consumer Finance, the credit risk of a financial asset will be considered to have experienced a significant increase in
credit risk since initial recognition where there has been a significant increase in the remaining lifetime probability of default
of the asset. The Group may also use its expert credit judgement and where possible relevant historical and current
performance data, including bureau data to determine that an exposure has undergone a significant increase in credit risk.
For Business Finance, the credit risk of a financial asset will be considered to have experienced a significant increase in
credit risk where certain early warning indicators apply (e.g. cost over runs, timing delays, notification of county court
judgements etc.).
As a backstop, the Group will consider that a significant increase in credit risk occurs no later than when an asset is more than
30 days past due for all portfolios.
The credit risk of a financial asset may improve such that it is no longer considered to have experienced a significant increase
in credit risk if it meets the Group’s cure policy.
Cure policy
The Group’s cure policy will require sufficient payments to be made to bring an account back within less than 30 days past
due and for such payments to be maintained for six consecutive months. For the Real Estate Finance portfolio payments
would need to be maintained for 12 consecutive months.
Definition of default/credit impaired financial assets
At each reporting date, the Group will assess whether financial assets carried at amortised cost are credit impaired.
A financial asset will be considered to be credit impaired when an event(s) that has a detrimental impact on estimated future
cash flows have occurred. Evidence that a financial asset is credit impaired includes the following observable data:
• Initiation of bankruptcy proceedings;
• Notification of bereavement;
• Identification of loan meeting debt sale criteria; or
• Initiation of repossession proceedings.
In addition, a loan that is 90 days or more past due will be considered credit impaired for all portfolios. The credit risk of financial
assets that become credit impaired are not expected to improve such that they are no longer considered credit impaired.
Modified financial assets
A customer’s account may be modified to assist customers who are in or have recently overcome financial difficulties and
have demonstrated both the ability and willingness to meet the current or modified loan contractual payments. Where the
terms of a financial asset have been modified and the modification has not resulted in derecognition, the expected cash flows
arising from the modified financial asset are included in calculating any cash shortfalls from the existing asset.
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157
Secure Trust Bank PLC Annual Report & Accounts 2017
Straightforward transparent banking
Notes to the consolidated financial statements
continued
29. Credit risk continued
Inputs in to measurement of ECL
The key inputs in to the measurement of expected credit loss will be:
• Probability of default (PD);
• Exposure at default (EAD); and
• Loss given default (LGD).
These variables will be derived from internally developed statistical models and historical data, adjusted to reflect forward
looking information.
Probability of default and credit risk grades
Credit risk grades will be a primary input into the determination of the PD for exposures. The Group will allocate each
exposure to a credit risk grade at origination and at each reporting period to predict the risk of default. Credit risk grades will
be determined using qualitative and quantitative factors that are indicative of the risk of default e.g. arrears status and loan
applications scores. These factors will vary for each loan portfolio. Exposures will be subject to ongoing monitoring, which
may result in an exposure being moved to a different credit risk grade. In monitoring exposures information such as payment
records, request for forbearance strategies and forecast changes in economic conditions will be considered for the Consumer
Finance portfolio. Additionally for the Business Finance portfolio information obtained during periodic reviews, for example
audited financial statements, management accounts, budgets and projections will be considered, with particular focus on key
ratios, compliance with covenants and changes in senior management teams.
Exogenous, Maturity, Vintage (EMV) modelling will be used in the production of forward looking lifetime PDs. This method
will entail modelling the effects of external (exogenous) factors against cohorts of lending and their time on the books
creating a clean relationship to best demonstrate the movement in default rates as macroeconomic variables are changed.
These models will be extrapolated to provide PD estimates for the future, based on forecasted economic scenarios.
As the Group’s performance data does not go back far enough to capture a full economic cycle, the proxy series of the
quarterly rates of write offs for UK unsecured lending data will be used to build an economic response model (ERM) to
incorporate the effects of recession.
The portfolios for which external benchmark information represents a significant input into the measurement of ECL are
as follows:
Exposure (£m)
LGD
PD
External benchmarks used
Real Estate Finance
£581.0
CML Repossessions and
Default Rates
The benchmarks below relate
to all three portfolios: S&P
Ratings; BOE UK Possessions
as proxy data for ERM
Asset Finance
Commercial Finance
£117.9
£127.1
N/A
N/A
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Financial Statements
29. Credit risk continued
Exposure at default
EAD represents the expected exposure in the event of a default. EAD will be derived from the current exposure and potential
changes to the current amount allowed under the terms of the contract, including amortisation overpayments and early
terminations. The EAD of a financial asset is its gross carrying amount. For loan commitments the EAD includes the amount
drawn as well as potential future amounts that may be drawn under the terms of the contract, estimated based on historical
observations and forward looking forecasts.
For Commercial Finance facilities that have no specific term an assumption will be made that accounts close 36 months after
the reporting date. This assumption is based on industry experience of average client life. The Group therefore measures the
lifetime ECL for these assets over an assumed 36 month period.
These facilities do not have a fixed term or repayment structure but are revolving and increase or decrease to reflect the value
of the collateral i.e. receivables or inventory. The Group can cancel them with immediate effect but this contractual right is
not enforced in the normal day to day management of the facility. Typically, demand would only be made on failure of a client
business or in the event of a material event of default, such as a fraud. In the normal course of events, the Group’s exposure is
recovered through receipt of remittances from the client’s debtors rather than from the client itself. The ECL for such facilities
will be estimated taking into account the credit risk management actions that the Group expects to take to mitigate against
such losses. These include a reduction in advance rate and facility limits or application of reserves against a facility so as to
improve the likelihood of full recovery of exposure from the debtors. Alternative recovery routes mitigating ECL would
include refinance by another funding provider, taking security over other asset classes or secured personal guarantees from
the client’s principals.
Loss given default
LGD is the magnitude of the likely loss in the event of default. This will take into account recoveries either through curing or,
where applicable, through auction sale of repossessed collateral and debt sale of the residual shortfall amount. For loans
secured by retail property loan to value (LTV) ratios are key parameters in determining LGD. LGD’s will be calculated on a
discounted cash flow basis using the financial instrument’s origination effective interest rate as the discount factor.
Incorporation of forward looking data
The Group will incorporate forward looking information into both its assessment of whether the credit risk of a financial asset
has increased significantly since initial recognition and its measurement of expected credit loss. This will be achieved by
developing a number of potential economic scenarios and modelling expected credit losses for each scenario. The outputs
from each scenario will be combined, using the estimated likelihood of each scenario occurring to derive a probability
weighted expected credit loss. The scenarios adopted and probability weighting applied will both be approved by the
Assumptions Committee.
The scenarios expected to be adopted at 1 January 2018 were as follows:
Scenario
Derivation
Base case
Benign case
Stressed case
Deeper stress
Derived from external consensus forecasts, primarily from the Bank of England, and
used in the Group’s strategic planning and budgeting processes.
Assumes that the expected credit loss models are unaffected by changing
macroeconomic variables.
Management’s assessment, based on historic data, of an adverse scenario that could
occur once every seven to eight years.
Based on the scenario used by the PRA for the H1 2017 ICAAP. This can be found on the
Bank of England’s website: www.bankofengland.co.uk
Weighting
80%
5%
10%
5%
The key drivers of credit risk and credit losses included in the above scenarios have been identified as annual unemployment
rate growth, changes to the consumer price index and annual house price index growth.
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Secure Trust Bank PLC Annual Report & Accounts 2017
Straightforward transparent banking
Notes to the consolidated financial statements
continued
29. Credit risk continued
c) Classification of financial liabilities
The treatment of financial liabilities is carried forward to IFRS 9 essentially unchanged from IAS 39. The only aspect to change
is the treatment of financial liabilities that an entity elects to measure at fair value. The Group does not elect to measure any
of its liabilities at fair value and therefore expects no impact to arise from adopting these new requirements.
d) Disclosures
IFRS 9 will require extensive new disclosures regarding credit risk and ECLs.
e) Impact on capital planning
The European Banking Authority has issued guidance on the transition requirements for the implementation of IFRS 9.
The guidelines allow a choice of two approaches to recognise the impact of implementing IFRS 9 on regulatory capital:
• Phase in the impact over a five year period (applying add back factors of 95%, 85%, 70%, 50% and 25% for years one
to five respectively); or
• Recognise the impact in full on transition to IFRS 9
The Group has agreed to adopt the first approach. It is expected that implementation of IFRS 9 will result in a decrease
in the Group’s CET 1 ratio in the range of 8 to 10 basis points.
f) Transition
Changes in accounting policies resulting from adoption of IFRS 9 will be applied retrospectively, except as noted below:
• Comparative periods will not be restated. Differences in the carrying amount of financial instruments resulting from
adoption of IFRS 9 will be recognised in retained earnings and reserves as at 1 January 2018;
• The determination of the business model within which a financial asset is held will be made based on the facts and
circumstances that existed at the date of initial application; and
• If a debt security was deemed to have low credit risk at the date of initial application, then the Group will assume that the
credit risk of the asset had not increased significantly since its initial recognition. A financial asset is considered to have low
credit risk when its credit risk rating is equivalent to the widely understood definition of investment grade.
30. Market risk
Market risks arise from open positions in interest rate and currency products, all of which are exposed to general and specific
market movements. The Group and Company have no significant exposures to foreign currencies and therefore there is no
significant currency risk.
Interest rate risk
Interest rate risk is the potential adverse impact on the Company and Group’s future cash flows from changes in interest rates
and arises from the differing interest rate risk characteristics of the Company and Group’s assets and liabilities. In particular,
fixed rate savings and borrowing products expose the Group to the risk that a change in interest rates could cause either
a reduction in interest income or an increase in interest expense relative to variable rate interest flows. The Group seeks
to ‘match’ interest rate risk on either side of the statement of financial position. However, this is not a perfect match and
interest rate risk is present on money market deposits of a fixed rate nature, fixed rate loans and fixed rate savings products.
The Group monitors the interest rate mismatch on a monthly basis.
The interest rate mismatch is monitored, throughout the maturity bandings of the book on a parallel scenario for 100 and 200
basis points movements. The Group considers the 100 and 200 basis points movement to be appropriate for scenario testing
given the current economic outlook and industry expectations. This typically results in a pre-tax mismatch of £0.7 million or
less (2016: £0.7 million or less) for the Company and Group, with the same impact to equity pre-tax.
160
Total assets
846.6
121.3
181.9
696.0
43.5
1,891.6
Strategic Report
Corporate Governance Report
Financial Statements
30. Market risk continued
Interest rate sensitivity gap
The following tables summarise the re-pricing periods for the assets and liabilities in the Company and Group. Items are
allocated to time bands by reference to the earlier of the next contractual interest rate re-price and the maturity date.
More than
3 months
but less than
More than
6 months
but less than
More than
1 year
but less than
6 months
£million
1 year
£million
5 years
£million
Within
3 months
£million
More than
5 years
£million
Non
interest
bearing
£million
Group
As at 31 December 2017
ASSETS
Cash and balances at central banks
Loans and advances to banks
Debt securities held-to-maturity
Loans and advances to customers
Other assets
LIABILITIES AND EQUITY
Due to banks
Deposits from customers
Other liabilities
Equity
Total liabilities and equity
Interest rate sensitivity gap
Cumulative gap
Group
As at 31 December 2016
ASSETS
Cash and balances at central banks
Loans and advances to banks
Debt securities held-to-maturity
Loans and advances to customers
Other assets
226.1
34.3
5.0
581.2
–
–
–
–
121.3
–
–
–
–
181.9
–
–
–
–
696.0
–
113.0
577.2
–
–
690.2
156.4
156.4
–
28.2
–
–
28.2
93.1
249.5
–
269.9
–
–
269.9
(88.0)
161.5
–
581.4
–
–
581.4
114.6
276.1
More than
3 months
but less than
More than
6 months
but less than
More than
1 year
but less than
6 months
£million
1 year
£million
5 years
£million
Within
3 months
£million
More than
5 years
£million
Non
interest
bearing
£million
112.0
18.2
20.0
378.7
–
–
–
–
119.7
–
–
–
–
164.8
–
–
–
–
644.6
–
Total
£million
226.1
34.3
5.0
1,598.3
27.9
113.0
1,483.2
46.3
249.1
1,891.6
Total
£million
112.0
18.2
20.0
1,321.0
38.8
1,510.0
70.0
1,151.8
52.2
236.0
1,510.0
–
–
–
2.3
–
2.3
–
6.5
–
–
6.5
(4.2)
271.9
–
–
–
15.6
27.9
–
20.0
46.3
249.1
315.4
(271.9)
–
–
–
–
–
–
–
–
23.0
–
–
23.0
(23.0)
236.2
–
–
–
13.2
38.8
52.0
–
–
52.2
236.0
288.2
(236.2)
–
Total assets
528.9
119.7
164.8
644.6
LIABILITIES AND EQUITY
Due to banks
Deposits from customers
Other liabilities
Equity
30.0
462.4
–
–
40.0
66.7
–
–
Total liabilities and equity
492.4
106.7
Interest rate sensitivity gap
Cumulative gap
36.5
36.5
13.0
49.5
–
63.8
–
–
63.8
101.0
150.5
–
535.9
–
–
535.9
108.7
259.2
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161
Secure Trust Bank PLC Annual Report & Accounts 2017
Straightforward transparent banking
Notes to the consolidated financial statements
continued
Total assets
840.0
119.2
178.3
689.1
30. Market risk continued
Company
As at 31 December 2017
ASSETS
Cash and balances at central banks
Loans and advances to banks
Debt securities held-to-maturity
Loans and advances to customers
Other assets
LIABILITIES AND EQUITY
Due to banks
Deposits from customers
Other liabilities
Equity
Total liabilities and equity
Interest rate sensitivity gap
Cumulative gap
Company
As at 31 December 2016
ASSETS
Cash and balances at central banks
Loans and advances to banks
Debt securities held-to-maturity
Loans and advances to customers
Other assets
More than
3 months
but less than
More than
6 months
but less than
More than
1 year
but less than
6 months
£million
1 year
£million
5 years
£million
Within
3 months
£million
More than
5 years
£million
Non
interest
bearing
£million
226.1
32.3
5.0
576.6
–
–
–
–
119.2
–
–
–
–
178.3
–
–
–
–
689.1
–
113.0
577.2
–
–
690.2
149.8
149.8
–
28.2
–
–
28.2
91.0
240.8
–
269.9
–
–
269.9
(91.6)
149.2
–
581.4
–
–
581.4
107.7
256.9
More than
3 months
but less than
More than
6 months
but less than
More than
1 year
but less than
6 months
£million
1 year
£million
5 years
£million
Within
3 months
£million
More than
5 years
£million
Non
interest
bearing
£million
112.0
16.5
20.0
378.6
–
–
–
–
119.1
–
–
–
–
162.3
–
–
–
–
629.2
–
Total
£million
226.1
32.3
5.0
1,565.5
52.1
1,881.0
113.0
1,483.2
47.7
237.1
1,881.0
Total
£million
112.0
16.5
20.0
1,289.2
65.0
1,502.7
70.0
1,151.8
59.1
221.8
1,502.7
–
–
–
2.3
–
2.3
–
6.5
–
–
6.5
(4.2)
252.7
–
–
–
–
52.1
52.1
–
20.0
47.7
237.1
304.8
(252.7)
–
–
–
–
–
–
–
–
23.0
–
–
23.0
(23.0)
215.9
–
–
–
–
65.0
65.0
–
–
59.1
221.8
280.9
(215.9)
–
Total assets
527.1
119.1
162.3
629.2
LIABILITIES AND EQUITY
Due to banks
Deposits from customers
Other liabilities
Equity
30.0
462.4
–
–
40.0
66.7
–
–
Total liabilities and equity
492.4
106.7
Interest rate sensitivity gap
Cumulative gap
34.7
34.7
12.4
47.1
–
63.8
–
–
63.8
98.5
145.6
–
535.9
–
–
535.9
93.3
238.9
162
Strategic Report
Corporate Governance Report
Financial Statements
31. Liquidity risk
Liquidity risk is the risk that the Group will encounter difficulty in meeting obligations associated with its financial liabilities
that are settled by delivering cash or another financial asset.
The Group’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to
meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking
damage to the Group’s reputation. The liquidity requirements of the Group are met through withdrawing funds from its
Bank of England Reserve Account to cover any short-term fluctuations and, longer term funding to address any structural
liquidity requirements.
The Company has a formal governance structure in place to manage and mitigate liquidity risk on a day-to-day basis.
The Board sets and approves the Company’s liquidity risk management strategy. The ALCO, comprising senior executives
of the Company, monitors liquidity risk. Key liquidity risk management information is reported by the Treasury function and
monitored by the Chief Executive Officer and Chief Financial Officer on a daily basis. The ALCO meets monthly to review
liquidity risk against set thresholds and risk indicators including early warning indicators, liquidity risk tolerance levels and
ILAAP metrics.
The Company issued fixed rate deposit bonds to customers during the year as set out below:
Amount
Term
2017
2016
£347.9 million
1 to 5 years
£299.0 million
1 to 7 years
These were issued to broadly match the term lending by the Company.
The PRA requires a firm to maintain at all times liquidity resources which are adequate, both as to amount and quality, to
ensure that there is no significant risk that its liabilities cannot be met as they fall due. There is also a requirement that a firm
ensures its liquidity resources contain an adequate buffer of high quality, unencumbered assets (i.e. Government Securities
in the liquidity asset buffer); and it maintains a prudent funding profile. The liquidity assets buffer is a pool of highly liquid
assets that can be called upon to create sufficient liquidity to meet liabilities on demand, particularly in a period of liquidity
stress. The liquidity resources outside the buffer must either be marketable assets with a demonstrable secondary market
that the firm can access, or a credit facility that can be activated in times of stress.
The Group has a Board approved ILAAP. The ILAAP rules require STB to identify, measure, manage and monitor liquidity
and funding risks across different time horizons and stress scenarios, consistent with STB’s risk appetite as established by
the STB Board. The ILAAP seeks to document STB’s approach to liquidity and funding, and demonstrate that it complies
with the Overall Liquidity Adequacy Rule. The PRA’s approach to liquidity supervision is based on the principle that a firm
must have adequate levels of liquidity resources and a prudent funding profile, and that it comprehensively manages and
controls liquidity and funding risks. The liquidity buffer required by the ILAAP has been put in place and maintained since
that time. Liquidity resources outside of the buffer are made up of deposits placed at the Bank of England. The ILAAP is
updated annually.
The primary measures used by management to assess the adequacy of liquidity is the Overall Liquidity Adequacy Rule,
which is the Board’s own view of the Group’s liquidity needs as set out in the Board approved ILAAP. The Group maintained
liquidity in excess of the Overall Liquidity Adequacy Rule throughout the year ended 31 December 2017.
The LCR regime has applied to the Group from 1 October 2016, requiring management of net 30 day cash outflows as a
proportion of High Quality Liquid Assets. STB has set a more prudent internal limit. The actual LCR has significantly
exceeded both limits throughout the year.
The Group is exposed to daily calls on its available cash resources from current accounts, maturing deposits and loan
draw-downs. The Group maintains significant cash resources to meet all of these needs as they fall due.
The matching and controlled mismatching of the maturities and interest rates of assets and liabilities is fundamental to the
management of the Group. It is unusual for banks to be completely matched, as transacted business is often of uncertain
term and of different types.
www.securetrustbank.co.uk
163
Secure Trust Bank PLC Annual Report & Accounts 2017
Straightforward transparent banking
Notes to the consolidated financial statements
continued
31. Liquidity risk continued
The maturities of assets and liabilities and the ability to replace, at an acceptable cost, interest bearing liabilities as they
mature are important factors in assessing the liquidity of the Group and its exposure to changes in interest rates.
The tables below analyse the contractual undiscounted cash flows for the financial liabilities and assets into relevant
maturity groupings:
Group
At 31 December 2017
Non-derivative financial liabilities
Due to banks
Deposits from customers
Other financial liabilities
Non-derivative financial assets
Cash and balances at central banks
Loans and advances to banks
Debt securities held-to-maturity
Loans and advances to customers
Other financial assets
Carrying
amount
£million
Gross
nominal
inflow/
(outflow)
£million
Not more
than
3 months
£million
More than
3 months
but less than
1 year
£million
More than
1 year but
less than
5 years
£million
More than
5 years
£million
113.0
1,483.2
29.5
(115.1)
(1,517.2)
(29.5)
(0.1)
(580.8)
(29.5)
(0.4)
(318.6)
–
(114.6)
(611.1)
–
1,625.7
(1,661.8)
(610.4)
(319.0)
(725.7)
226.1
34.3
5.0
1,598.3
1.2
226.1
34.3
5.0
2,054.4
1.2
1,864.9
2,321.0
226.1
34.3
5.0
667.8
1.2
934.4
–
–
–
420.8
–
420.8
–
–
–
965.3
–
965.3
–
(6.7)
–
(6.7)
–
–
–
0.5
–
0.5
Liquidity mismatch
239.2
659.2
324.0
101.8
239.6
(6.2)
Group
At 31 December 2016
Non-derivative financial liabilities
Due to banks
Deposits from customers
Other financial liabilities
Non-derivative financial assets
Cash and balances at central banks
Loans and advances to banks
Debt securities held-to-maturity
Loans and advances to customers
Other financial assets
Carrying
amount
£million
Gross
nominal
inflow/
(outflow)
£million
Not more
than
3 months
£million
More than
3 months
but less than
1 year
£million
More than
1 year but
less than
5 years
£million
More than
5 years
£million
70.0
1,151.8
18.3
(70.0)
(1,202.9)
(18.3)
(30.0)
(461.6)
(18.3)
(40.0)
(147.9)
–
–
(569.5)
–
–
(23.9)
–
1,240.1
(1,291.2)
(509.9)
(187.9)
(569.5)
(23.9)
112.0
18.2
20.0
1,321.0
0.9
1,472.1
112.0
18.2
20.0
1,955.5
0.9
2,106.6
112.0
18.2
20.0
349.1
0.9
500.2
–
–
–
413.9
–
413.9
–
–
–
1,192.2
–
1,192.2
–
–
–
0.3
–
0.3
Liquidity mismatch
232.0
815.4
(9.7)
226.0
622.7
(23.6)
164
Strategic Report
Corporate Governance Report
Financial Statements
31. Liquidity risk continued
Company
At 31 December 2017
Non-derivative financial liabilities
Due to banks
Deposits from customers
Other financial liabilities
Non-derivative financial assets
Cash and balances at central banks
Loans and advances to banks
Debt securities held-to-maturity
Loans and advances to customers
Other financial assets
Carrying
amount
£million
Gross
nominal
inflow/
(outflow)
£million
Not more
than
3 months
£million
More than
3 months
but less than
1 year
£million
More than
1 year but
less than
5 years
£million
More than
5 years
£million
113.0
1,483.2
34.2
(115.1)
(1,517.2)
(34.2)
(0.1)
(580.8)
(34.2)
(0.4)
(318.6)
–
(114.6)
(611.1)
–
1,630.4
(1,666.5)
(615.1)
(319.0)
(725.7)
226.1
32.3
5.0
1,565.5
30.7
226.1
32.3
5.0
2,017.5
30.7
1,859.6
2,311.6
226.1
32.3
5.0
646.6
30.7
940.7
–
–
–
413.1
–
413.1
–
–
–
957.3
–
957.3
–
(6.7)
–
(6.7)
–
–
–
0.5
–
0.5
Liquidity mismatch
229.2
645.1
325.6
94.1
231.6
(6.2)
Company
At 31 December 2016
Non-derivative financial liabilities
Due to banks
Deposits from customers
Other financial liabilities
Non-derivative financial assets
Cash and balances at central banks
Loans and advances to banks
Debt securities held-to-maturity
Loans and advances to customers
Other financial assets
Carrying
amount
£million
Gross
nominal
inflow/
(outflow)
£million
Not more
than
3 months
£million
More than
3 months
but less than
1 year
£million
More than
1 year but
less than
5 years
£million
More than
5 years
£million
70.0
1,151.8
30.7
(70.0)
(1,202.9)
(30.7)
(30.0)
(461.6)
(30.7)
(40.0)
(147.9)
–
–
(569.5)
–
–
(23.9)
–
1,252.5
(1,303.6)
(522.3)
(187.9)
(569.5)
(23.9)
112.0
16.5
20.0
1,289.2
33.0
112.0
16.5
20.0
1,921.5
33.0
1,470.7
2,103.0
112.0
16.5
20.0
345.7
33.0
527.2
–
–
–
397.6
–
397.6
–
–
–
1,177.9
–
1,177.9
–
–
–
0.3
–
0.3
Liquidity mismatch
218.2
799.4
4.9
209.7
608.4
(23.6)
The maturities of assets and liabilities and the ability to replace, at an acceptable cost, interest bearing financial liabilities as
they mature are important factors in assessing the liquidity of the Company and Group and its exposure to changes in
interest rates and exchange rates.
Other financial liabilities, as shown above, do not include non-interest accruals as these are not classed as financial liabilities.
www.securetrustbank.co.uk
165
Secure Trust Bank PLC Annual Report & Accounts 2017
Straightforward transparent banking
Notes to the consolidated financial statements
continued
32. Capital risk
The Group’s capital management policy is focused on optimising shareholder value, in a safe and sustainable manner.
There is a clear focus on delivering organic growth and ensuring capital resources are sufficient to support planned levels
of growth. The Board regularly reviews the capital position.
In accordance with CRD IV and the required parameters set out in the Capital Requirements Regulation, the Group’s ICAAP is
embedded in the risk management framework of the Group and is subject to ongoing updates and revisions when necessary.
However, at a minimum, the ICAAP is updated annually as part of the business planning process. The ICAAP is a process that
brings together the management framework (i.e. the policies, procedures, strategies, and systems that the Group has
implemented to identify, manage and mitigate its risks) and the financial disciplines of business planning and capital
management. Prior to the sale of Arbuthnot’s controlling stake in the Group, the Group’s ICAAP was aggregated into the
Arbuthnot Banking Group’s ICAAP.
Not all material risks can be mitigated by capital, but where capital is appropriate the Board has adopted a ‘Pillar 1 plus’
approach to determine the level of capital the Group needs to hold. This method takes the Pillar 1 capital formula
calculations (standardised approach for credit, market and operational risk) as a starting point, and then considers whether
each of the calculations delivers a sufficient capital sum adequate to cover management’s anticipated risks. Where it is
considered that the Pillar 1 calculations do not reflect the risk, an additional capital add-on in Pillar 2 should be applied,
as per the Individual Capital Guidance issued by the PRA.
Pillar 3 complements the minimum capital requirements (Pillar 1) and the supervisory review process (Pillar 2). Its aim is to
encourage market discipline by developing a set of disclosure requirements which would allow market participants to assess
key pieces of information on a firm’s capital, risk exposures and risk assessment processes. Pillar 3 disclosures for the Group
for the year ended 31 December 2017 are published as a separate document on the Group’s website.
The following table shows the regulatory capital resources for the Group. Following the sale of its majority holding
in the Group by Arbuthnot Banking Group plc in 2016, the regulatory capital of the Group is now managed on a group
consolidated basis. Therefore, the prior year figures in the table below have been restated from a solo-consolidated basis
to a group consolidated basis, and the CET 1 capital ratio restated accordingly:
Tier 1
Share capital
Share premium
Retained earnings
Revaluation reserve
Available-for-sale reserve
Goodwill
Intangible assets net of attributable deferred tax
CET 1 capital
Tier 2
Collective allowance for impairment of loans and advances
Total Tier 2 capital
Own Funds
Reconciliation to total equity:
Goodwill and other intangible assets net of attributable deferred tax
Collective allowance for impairment of loans and advances
Total equity
166
2017
£million
2016
£million
7.4
81.2
159.2
1.3
–
(1.0)
(9.2)
238.9
4.4
4.4
7.4
81.2
149.0
1.2
(2.8)
(1.0)
(7.6)
227.4
5.3
5.3
243.3
232.7
10.2
(4.4)
249.1
8.6
(5.3)
236.0
Strategic Report
Corporate Governance Report
Financial Statements
32. Capital risk continued
The Group ICAAP includes a summary of the capital required to mitigate the identified risks in its regulated entities and the
amount of capital that the Group has available. The PRA sets Individual Capital Guidance for each UK bank calibrated by
reference to its Capital Resources Requirement, broadly equivalent to 8% of risk weighted assets and thus representing the
capital required under Pillar 1 of the Basel III framework. The ICAAP is a key input into the PRA’s Individual Capital Guidance
setting process, which addresses the requirements of Pillar 2 of the Basel II framework. The PRA’s approach is to monitor the
available capital resources in relation to the Individual Capital Guidance requirement. The Group maintains an extra internal
buffer and capital ratios are reviewed on a monthly basis to ensure that external and internal requirements are adhered to.
The Group is also subject to further capital requirements imposed by the PRA on all financial services firms. During the
periods, the Group complied with these requirements.
33. Maturity analysis of consolidated assets and liabilities
Group
Contractual maturity analysis at 31 December 2017
Due within
one year
£million
Due after
more than
one year
£million
No
contractual
maturity
£million
ASSETS
Cash and balances at central banks
Loans and advances to banks
Loans and advances to customers
Debt securities held-to-maturity
Property, plant and equipment
Intangible assets
Deferred tax assets
Other assets
Total assets
LIABILITIES
Due to banks
Deposits from customers
Current tax liabilities
Other liabilities
Provisions for liabilities and charges
Total liabilities
226.1
34.3
884.4
5.0
–
–
–
–
1,149.8
113.0
875.3
3.0
–
–
991.3
–
–
698.3
–
–
–
–
–
698.3
–
587.9
–
–
–
587.9
–
–
15.6
–
11.5
10.4
0.6
5.4
43.5
–
20.0
–
41.9
1.4
63.3
Total
£million
226.1
34.3
1,598.3
5.0
11.5
10.4
0.6
5.4
1,891.6
113.0
1,483.2
3.0
41.9
1.4
1,642.5
www.securetrustbank.co.uk
167
Secure Trust Bank PLC Annual Report & Accounts 2017
Straightforward transparent banking
Notes to the consolidated financial statements
continued
33. Maturity analysis of consolidated assets and liabilities continued
Group
Contractual maturity analysis at 31 December 2016
ASSETS
Cash and balances at central banks
Loans and advances to banks
Loans and advances to customers
Debt securities held-to-maturity
Equity instruments available-for-sale
Property, plant and equipment
Intangible assets
Other assets
Total assets
LIABILITIES
Due to banks
Deposits from customers
Current tax liabilities
Deferred tax liabilities
Other liabilities
Total liabilities
Due within
one year
£million
Due after
more than
one year
£million
No
contractual
maturity
£million
112.0
18.2
663.2
20.0
–
–
–
4.9
818.3
70.0
592.9
1.7
–
47.4
712.0
–
–
657.8
–
–
–
–
–
657.8
–
558.9
–
0.2
2.9
562.0
–
–
–
–
13.5
11.4
9.0
–
33.9
–
–
–
–
–
–
Total
£million
112.0
18.2
1,321.0
20.0
13.5
11.4
9.0
4.9
1,510.0
70.0
1,151.8
1.7
0.2
50.3
1,274.0
The directors have reviewed behavioural maturity of the loan book and have concluded that it would not significantly affect
the analysis above.
168
Strategic Report
Corporate Governance Report
Financial Statements
33. Maturity analysis of consolidated assets and liabilities continued
Company
Contractual maturity analysis at 31 December 2017
ASSETS
Cash and balances at central banks
Loans and advances to banks
Loans and advances to customers
Debt securities held-to-maturity
Property, plant and equipment
Intangible assets
Investments
Deferred tax assets
Other assets
Total assets
1,137.5
691.4
LIABILITIES
Due to banks
Deposits from customers
Current tax liabilities
Other liabilities
Provisions for liabilities and charges
Total liabilities
113.0
875.3
1.9
–
–
990.2
–
587.9
–
–
–
587.9
Due within
one year
£million
Due after
more than
one year
£million
No
contractual
maturity
£million
226.1
32.3
874.1
5.0
–
–
–
–
–
–
–
691.4
–
–
–
–
–
–
Total
£million
226.1
32.3
1,565.5
5.0
6.1
8.5
3.7
0.6
33.2
1,881.0
113.0
1,483.2
1.9
44.4
1.4
1,643.9
–
–
–
–
6.1
8.5
3.7
0.6
33.2
52.1
–
20.0
–
44.4
1.4
65.8
www.securetrustbank.co.uk
169
Secure Trust Bank PLC Annual Report & Accounts 2017
Straightforward transparent banking
Notes to the consolidated financial statements
continued
33. Maturity analysis of consolidated assets and liabilities continued
Company
At 31 December 2016
ASSETS
Cash and balances at central banks
Loans and advances to banks
Loans and advances to customers
Debt securities held-to-maturity
Equity instruments available-for-sale
Property, plant and equipment
Intangible assets
Investments
Deferred tax assets
Other assets
Total assets
LIABILITIES
Due to banks
Deposits from customers
Current tax liabilities
Other liabilities
Total liabilities
Due within
one year
£million
Due after
more than
one year
£million
No
contractual
maturity
£million
112.0
16.5
660.0
20.0
13.5
–
–
–
–
35.3
857.3
70.0
592.9
0.8
58.3
722.0
–
–
629.2
–
–
–
–
–
0.1
–
629.3
–
558.9
–
–
558.9
Total
£million
112.0
16.5
1,289.2
20.0
13.5
6.2
6.2
3.7
0.1
35.3
–
–
–
–
–
6.2
6.2
3.7
–
–
16.1
1,502.7
–
–
–
–
–
70.0
1,151.8
0.8
58.3
1,280.9
The directors have reviewed behavioural maturity of the loan book and have concluded that it would not significantly affect
the analysis above.
170
Strategic Report
Corporate Governance Report
Financial Statements
Total
carrying
amount
£million
226.1
34.3
1,598.3
5.0
1.2
Fair value
£million
226.1
34.3
1,641.1
5.0
1.2
1,864.9
1,907.7
Fair value
hierarchy
level
Level 1
Level 2
Level 3
Level 1
Level 3
113.0
1,483.2
29.5
113.0
1,483.2
29.5
113.0
1,481.6
29.5
Level 2
Level 3
Level 3
1,625.7
1,625.7
1,624.1
Other
financial
assets and
liabilities
£million
–
–
–
–
–
0.9
0.9
Total
carrying
amount
£million
112.0
18.2
1,321.0
20.0
13.5
0.9
Fair value
£million
112.0
18.2
1,399.8
20.0
13.5
0.9
1,485.6
1,564.4
Fair value
hierarchy
level
Level 1
Level 2
Level 3
Level 1
Level 1
Level 3
70.0
1,151.8
18.3
70.0
1,151.8
18.3
70.0
1,160.9
18.3
Level 2
Level 3
Level 3
1,240.1
1,240.1
1,249.2
34. Classification of financial assets and liabilities
Group
At 31 December 2017
Cash and balances at central banks
Loans and advances to banks
Loans and advances to customers
Debt securities held-to-maturity
Other financial assets
Due to banks
Deposits from customers
Other financial liabilities
Held to
maturity
£million
Loans and
receivables
£million
Other
financial
assets and
liabilities
£million
–
–
–
–
1.2
1.2
–
–
–
5.0
–
5.0
–
–
–
–
226.1
34.3
1,598.3
–
–
1,858.7
–
–
–
–
Group
At 31 December 2016
Available-for-
sale
£million
Held to
maturity
£million
Loans and
receivables
£million
Cash and balances at central banks
Loans and advances to banks
Loans and advances to customers
Debt securities held-to-maturity
Equity instruments available-for-sale
Other financial assets
Due to banks
Deposits from customers
Other financial liabilities
–
–
–
–
13.5
–
13.5
–
–
–
–
–
–
–
20.0
–
–
112.0
18.2
1,321.0
–
–
–
20.0
1,451.2
–
–
–
–
–
–
–
–
Equity investments held-for-sale are carried at fair value. All other assets and liabilities are carried at amortised cost.
Therefore for these assets and liabilities, the fair value hierarchy noted above relates to the disclosure in this note only.
During the period, the underlying methodology used to calculate the fair values of loans and advances to customers
has been enhanced to calculate fair values on an individual business segment basis. Accordingly the comparatives
as at 31 December 2016 have been re-presented on this basis.
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Secure Trust Bank PLC Annual Report & Accounts 2017
Straightforward transparent banking
Notes to the consolidated financial statements
continued
34. Classification of financial assets and liabilities continued
Company
At 31 December 2017
Cash and balances at central banks
Loans and advances to banks
Loans and advances to customers
Debt securities held-to-maturity
Other financial assets
Due to banks
Deposits from customers
Other financial liabilities
–
–
–
5.0
–
5.0
–
–
–
–
Held to
maturity
£million
Loans and
receivables
£million
Other
financial
assets and
liabilities
£million
226.1
32.3
1,565.5
–
–
–
–
–
–
30.7
Total
carrying
amount
£million
226.1
32.3
1,565.5
5.0
30.7
Fair value
£million
226.1
32.3
1,608.3
5.0
30.7
Fair value
hierarchy
level
Level 1
Level 2
Level 3
Level 1
Level 3
1,823.9
30.7
1,859.6
1,902.4
–
–
–
–
113.0
1,483.2
34.2
113.0
1,483.2
34.2
113.0
1,481.6
34.2
Level 2
Level 3
Level 3
1,630.4
1,630.4
1,628.8
Other
financial
assets and
liabilities
£million
–
–
–
–
–
33.0
Total
carrying
amount
£million
112.0
16.5
1,289.2
20.0
13.5
33.0
Fair value
£million
112.0
16.5
1,591.1
20.0
13.5
33.0
Fair value
hierarchy
level
Level 1
Level 2
Level 3
Level 1
Level 1
Level 3
–
–
–
20.0
–
–
112.0
16.5
1,289.2
–
–
–
20.0
1,417.7
33.0
1,484.2
1,786.1
–
–
–
–
–
–
–
–
70.0
1,151.8
30.7
70.0
1,151.8
30.7
70.0
1,173.2
30.7
Level 2
Level 3
Level 3
1,252.5
1,252.5
1,273.9
Company
At 31 December 2016
Available-for-
sale
£million
Held to
maturity
£million
Loans and
receivables
£million
Cash and balances at central banks
Loans and advances to banks
Loans and advances to customers
Debt securities held-to-maturity
Equity instruments available-for-sale
Other financial assets
Due to banks
Deposits from customers
Other financial liabilities
–
–
–
–
13.5
–
13.5
–
–
–
–
Equity investments available-for-sale are carried at fair value. All other assets and liabilities are carried at amortised cost.
Therefore for these assets, the fair value hierarchy noted above relates to the disclosure in this note only.
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Financial Statements
34. Classification of financial assets and liabilities continued
Fair value classification
The tables above include the fair values and fair value hierarchies of the Group and Company’s financial assets and liabilities.
The Group measures fair value using the following fair value hierarchy that reflects the significance of the inputs used in
making measurements:
• Level 1: Quoted prices in active markets for identical assets or liabilities.
• Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly
(i.e. as prices) or indirectly (i.e. derived from prices).
• Level 3: Inputs for the asset or liability that are not based on observable market data (unobservable inputs).
Cash and balances at central banks
The fair value of cash and balances at central banks was calculated based upon the present value of the expected future
principal and interest cash flows. The rate used to discount the cash flows was the market rate of interest at the balance
sheet date.
At the end of each year, the fair value of cash and balances at central banks was calculated to be equivalent to their
carrying value.
Loans and advances to banks
The fair value of loans and advances to banks was calculated based upon the present value of the expected future principal
and interest cash flows. The rate used to discount the cash flows was the market rate of interest at the balance sheet date.
Loans and advances to customers
The fair value of loans and advances to customers was calculated based upon the present value of the expected future
principal and interest cash flows. The rate used to discount the cash flows was the market rate of interest at the balance sheet
date, and the same assumptions regarding the risk of default were applied as those used to derive the carrying value.
Debt securities held-to-maturity and equity instruments available-for-sale
The fair value of debt securities held-to-maturity and equity instruments available-for-sale is based on the quoted mid-market
share price.
At the end of December 2017 the fair value of debt securities held-to-maturity was calculated to be equivalent to their
carrying value.
Due to banks
The fair value of amounts due to banks was calculated based upon the present value of the expected future principal and
interest cash flows. The rate used to discount the cash flows was the market rate of interest at the balance sheet date.
At the end of each year, the fair value of amounts due to banks was calculated to be equivalent to their carrying value due
to the short maturity term of the amounts due.
Deposits from customers
The fair value of deposits from customers was calculated based upon the present value of the expected future principal and
interest cash flows. The rate used to discount the cash flows was the market rate of interest at the balance sheet date for the
notice deposits and deposit bonds. The fair value of instant access deposits is equal to book value as they are repayable
on demand.
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Secure Trust Bank PLC Annual Report & Accounts 2017
Straightforward transparent banking
Notes to the consolidated financial statements
continued
34. Classification of financial assets and liabilities continued
Dividends and other financial liabilities
The fair value of dividends and other financial liabilities was calculated based upon the present value of the expected future
principal cash flows.
At the end of each year, the fair value of dividends and other financial liabilities was calculated to be equivalent to their
carrying value due to their short maturity. The other financial liabilities include all other liabilities other than non-interest
accruals.
35. Related party transactions
Related parties of the Company and Group include subsidiaries, Key Management Personnel, close family members of
Key Management Personnel and entities which are controlled, jointly controlled or significantly influenced, or for which
significant voting power is held, by Key Management Personnel or their close family members.
A number of banking transactions are entered into with related parties in the normal course of business on normal
commercial terms. These include loans and deposits as set out below. Except for the directors’ disclosures, there were
no other Key Management Personnel disclosures, therefore the tables below relate to directors and close members
of their family only.
Loans
Loans outstanding at 1 January
Loans advanced
Repayments
Interest applied
Loans outstanding at 31 December
Deposits
Deposits outstanding at 1 January
Additional deposits made during the year
Withdrawals during the year
Director retired
Deposits outstanding at 31 December
2017
£million
2016
£million
3.2
0.4
–
0.1
3.7
0.3
0.1
–
–
0.4
0.2
3.4
(0.5)
0.1
3.2
0.5
–
(0.1)
(0.1)
0.3
The loans outstanding above comprise the following:
• A £0.4 million advance (2016: £0.4 million) as part of a £2.5 million facility agreed with a company in which a director holds
50% of the voting shares, which is secured by property and personal guarantees; and
• A £3.3 million advance (2016: £2.8 million) as part of a £4.4 million facility agreed with a director, which is secured by
property and certain other undertakings.
Both of these transactions were agreed by the Group’s Real Estate Finance business and arose during the normal course
of business. Both loans were subject to the usual Board governance and Credit Committee approval procedures and are
on substantially the same terms as for comparable transactions with third parties.
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Financial Statements
35. Related party transactions continued
The Company undertook the following transactions with other companies in the Secure Trust Bank Group:
Debt Managers (Services) Limited – income from sale of debt portfolio
Debt Managers (Services) Limited – debt collection services
Secure Homes Services Limited – building rental paid
V12 Finance Group Limited – dividend received
V12 Retail Finance Limited – financial intermediary charges – applications proposed
V12 Retail Finance Limited – financial intermediary charges – applications accepted
V12 Retail Finance Limited – financial intermediary charges – loan set-up and processing
V12 Retail Finance Limited – loan book management and servicing fees
No longer related parties
Arbuthnot Banking Group PLC – group recharges
Everyday Lending Limited – interest income on loan receivable
2017
£million
2016
£million
(0.3)
0.2
0.4
(13.9)
5.1
2.3
4.5
8.9
7.2
–
–
–
7.2
(2.9)
–
0.4
–
4.5
2.2
4.4
7.1
15.7
0.2
1.9
2.1
17.8
The loans and advances with, and amounts receivable and payable to, related companies are noted below:
Amounts receivable from subsidiary undertakings
Amounts due to subsidiary undertakings
Company
2017
£million
Company
2016
£million
29.7
(9.7)
20.0
31.2
(13.2)
18.0
Directors’ remuneration
The directors’ emoluments (including pension contributions and benefits in kind) for the year are disclosed in the
Remuneration Report beginning on page 86.
At the year end the ordinary shares held by the directors are disclosed in the Directors’ Report beginning on page 98.
Details of the directors’ holdings of share options, as well as details of those share options exercised during the year,
are also disclosed in the Directors’ Report.
The interests of any directors who hold shares in the ultimate parent company, Arbuthnot Banking Group PLC, which was
the ultimate parent company until the sale of its controlling stake, are shown in the Directors’ Report of that company.
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Secure Trust Bank PLC Annual Report & Accounts 2017
Straightforward transparent banking
Notes to the consolidated financial statements
continued
36. Immediate and ultimate parent company
Prior to the sale of its controlling interest on 15 June 2016, the Company regarded Arbuthnot Banking Group PLC,
a company registered in England and Wales, as the immediate and ultimate parent company. At that time, Sir Henry Angest,
the Group Chairman and Chief Executive of Arbuthnot Banking Group, had a beneficial interest in 53.7% of the issued share
capital of Arbuthnot Banking Group and was regarded by the Company as the ultimate controlling party. A copy of the
consolidated financial statements of Arbuthnot Banking Group may be obtained from the Company Secretary,
Arbuthnot Banking Group, Arbuthnot House, 7 Wilson Street, London, EC2M 2SN.
Since 15 June 2016, the Company has had no ultimate controlling party.
37. Discontinued operations
a) Sale of unsecured personal loan portfolio
On 21 December 2017, the Bank agreed to sell its remaining portfolio of unsecured personal loans to Alpha Credit Solutions
8 S.à.r.l., a company owned by AnaCap Credit Opportunities III LP. As previously highlighted, the Group made the decision
to withdraw from the unsecured personal loan market in 2016, and the sale of this portfolio represents a full exit by the Group
from this market.
The net proceeds of sale, after transaction costs, amounted to £36.6 million, which will be used for general corporate
purposes including other forms of lending. The cash purchase consideration for the portfolio was calculated based on an
agreed price for the portfolio as at 30 June 2017, adjusted for cash receipts the Group has already received from the portfolio
during the period up to the date of completion.
The effect of the transaction is to accelerate capital realisation to reinvest into the Group’s core business while removing
any future credit risk associated with the portfolio. The profit arising on sale of the portfolio was £0.5 million before tax.
The Group continued to administer the portfolio until the completion of a migration of the portfolio to a third party
administrator appointed by the purchaser, which is due to be completed in the first half of 2018.
Details of the income statement, net assets disposed of and consequential gain recognised on disposal, and cash flow of
the discontinued operation are set out below:
Income statement
Interest receivable and similar income
Interest expense and similar charges
Net interest income
Fee and commission income
Fee and commission expense
Net fee and commission income
Operating income
Net impairment losses on loans and advances to customers
Operating expenses
Profit before income tax
Income tax expense
Profit after income tax
Gain recognised on disposal after tax (see below)
Profit for the period
2017
£million
2016
£million
8.0
–
8.0
–
–
–
8.0
(3.4)
(0.3)
4.3
(0.8)
3.5
0.4
3.9
11.2
–
11.2
–
–
–
11.2
(4.4)
(1.2)
5.6
(1.1)
4.5
–
4.5
As described in Note 3, funding costs and operating expenses are not aligned to operating segments for day to day
management of the business, so they cannot be allocated on a reliable basis. Accordingly, funding costs are not included
above, and operating expenses above relates only to those costs that are directly attributable to the discontinued business.
176
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Financial Statements
Assets sold on
21 December 2017
£million
36.1
37.1
(0.5)
36.6
0.5
(0.1)
0.4
Year ended
31 December
2017
£million
Year ended
31 December
2016
£million
3.5
0.8
3.4
7.7
28.0
35.7
4.5
1.1
4.4
10.0
8.8
18.8
37. Discontinued operations continued
Net assets disposed and gain recognised on disposal
ASSETS
Loans and advances to customers
Consideration
Cash
Less selling costs
Gain recognised on disposal before tax
Tax
Gain recognised on disposal after tax
Cash flow statement
Cash flows from discontinued operations
Cash flows from operating activities
Profit for the year
Adjustments for:
Income tax expense
Impairment losses on loans and advances to customers
Cash flows from operating profits before changes in operating assets and liabilities
Changes in operating assets and liabilities:
– net decrease in loans and advances to customers
Net cash inflow from operating activities and net increase
in cash and cash equivalents
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Secure Trust Bank PLC Annual Report & Accounts 2017
Straightforward transparent banking
Notes to the consolidated financial statements
continued
37. Discontinued operations continued
b) Sale of non-standard consumer lending business ELG
On 4 December 2015, the Bank agreed to the conditional sale of its non-standard consumer lending business, ELG, which
comprises Everyday Loans Holdings Limited and subsidiary companies Everyday Lending Limited and Everyday Loans
Limited, to NSF. Consideration received on completion comprised £106.9 million in cash and £16.3 million in NSF ordinary
shares. The disposal completed on 13 April 2016, and on completion NSF paid £215.0 million to the Group, being the
£106.9 million cash consideration plus repayment of intercompany debt of £108.1 million. Subsequently, NSF took a
£30.0 million three year loan from STB, which was repaid in full during 2017. After selling costs of £2.7 million, this resulted
in a gain recognised on disposal in 2016 of £116.8 million. In addition, staff costs of £3.5 million were incurred in respect of
the sale, which are included in 2016 operating expenses.
Details of the income statement, net assets disposed of and consequential gain recognised on disposal, assets and liabilities
held-for-sale at 31 December 2015 and cash flow of discontinued operations are set out below.
Income statement
Interest receivable and similar income
Interest expense and similar charges
Net interest income
Fee and commission income
Fee and commission expense
Net fee and commission income
Operating income
Net impairment losses on loans and advances to customers
Operating expenses
Profit before income tax
Income tax expense
Profit after income tax
Gain recognised on disposal (see below)
Profit for the period
2017
£million
2016
£million
–
–
–
–
–
–
–
–
–
–
–
–
–
–
11.1
–
11.1
0.1
(0.1)
–
11.1
(2.6)
(6.0)
2.5
(0.5)
2.0
116.8
118.8
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Strategic Report
Corporate Governance Report
Financial Statements
37. Discontinued operations continued
Net assets disposed and gain recognised on disposal
ASSETS
Loans and advances to banks
Loans and advances to customers
Property, plant and equipment
Intangible assets
Deferred tax assets
Other assets
Total assets
LIABILITIES
Current tax liabilities
Other liabilities
Total liabilities
Net assets disposed of
Consideration
Cash (including the settlement of inter-company debt)
NSF shares
Selling costs
Net assets disposed of
Gain recognised on disposal
The cash flow from the sale of subsidiary undertakings can be analysed as follows:
Cash consideration (including the settlement of inter-company debt)
Selling costs
Cash disposed of as part of sale
Group
£million
215.0
(2.7)
(2.4)
209.9
Assets and
liabilities
sold on
13 April 2016
£million
2.4
117.9
0.5
1.2
0.4
0.8
123.2
4.0
7.4
11.4
111.8
215.0
16.3
231.3
(2.7)
(111.8)
116.8
Company
£million
215.0
(2.7)
–
212.3
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Secure Trust Bank PLC Annual Report & Accounts 2017
Straightforward transparent banking
Notes to the consolidated financial statements
continued
37. Discontinued operations continued
Company
Assets held-for-sale comprised investment in subsidiary undertaking totaling £1.
Cash flow statement
Cash flows from discontinued operations
Cash flows from operating activities
Profit for the year
Adjustments for:
Income tax expense
Impairment losses on loans and advances to customers
Cash flows from operating profits before changes in operating assets and liabilities
Changes in operating assets and liabilities:
– net increase in loans and advances to customers
– net increase in other assets
– net increase in other liabilities
Net cash flows from operating activities
Net increase in cash and cash equivalents
Cash and cash equivalents at 1 January
Cash and cash equivalents disposed of / at 31 December
Year ended
31 December
2017
£million
Year ended
31 December
2016
£million
–
–
–
–
–
–
–
–
–
–
–
2.0
0.5
2.6
5.1
(6.2)
(0.3)
2.1
0.7
0.7
1.7
2.4
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Strategic Report
Corporate Governance Report
Financial Statements
38. Country-by-Country Reporting
The Capital Requirements (Country-by-Country Reporting) Regulations 2013 introduced reporting obligations for institutions
within the scope of CRD IV. The requirements aim to give increased transparency regarding the activities of institutions.
The Country-by-Country Information is set out below:
31 December 2017
Name
Nature of activity
Location
Turnover
£million
Number
of FTE
employees
Profit
before tax
£million
Tax paid
on profit
£million
Secure Trust Bank PLC
Banking services
UK
165.3
734
29.3
6.0
31 December 2016
Name
Nature of activity
Location
Turnover
£million
Number
of FTE
employees
Profit
before tax
£million
Tax paid
on profit
£million
Secure Trust Bank PLC
Banking services
UK
157.5
697
27.5
6.8
www.securetrustbank.co.uk
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Secure Trust Bank PLC Annual Report & Accounts 2017
Straightforward transparent banking
Five year summary (unaudited)
Profit for the year
Interest and similar income
Interest expense and similar charges
Net interest income
Net fee and commission income
Operating income
Impairment losses on loans and advances
Gain from a bargain purchase
Exceptional costs
Arbuthnot Banking Group recharges
Operating expenses
Profit on sale of equity instruments available-for-sale
Profit before income tax
2017
£million
2016
£million
2015
£million
2014
£million
2013
£million
149.3
(26.7)
122.6
14.9
137.5
(36.9)
–
–
–
(71.6)
0.3
29.3
141.1
(26.3)
114.8
14.5
129.3
(30.3)
–
–
–
(71.5)
–
27.5
139.7
(21.6)
118.1
14.4
132.5
(24.3)
–
–
(0.8)
(70.9)
–
36.5
93.6
(14.2)
79.4
18.5
97.9
(15.3)
–
–
(0.2)
(56.3)
–
26.1
73.8
(12.9)
60.9
18.1
79.0
(15.6)
0.4
(0.9)
(0.1)
(45.7)
–
17.1
2017
£million
2016
£million
2015
£million
2014
£million
2013
£million
Earnings per share for profit attributable to the equity holders of the Group during the year
(expressed in pence per share) – basic
128.8
754.1
157.8
122.3
78.3
Financial position
Cash and balances at central banks
Loans and advances to banks
Loans and advances to customers
Debt securities held-to-maturity
Other assets
Total assets
Due to banks
Deposits from customers
Other liabilities
Total shareholders’ equity
2017
£million
2016
£million
2015
£million
2014
£million
2013
£million
226.1
34.3
1,598.3
5.0
27.9
112.0
18.2
1,321.0
20.0
38.8
131.8
11.5
1,074.9
3.8
25.4
81.2
39.8
622.5
16.3
22.5
–
110.0
391.0
–
24.9
1,891.6
1,510.0
1,247.4
782.3
525.9
113.0
1,483.2
46.3
249.1
70.0
1,151.8
52.2
236.0
35.0
1,033.1
38.1
141.2
15.9
608.4
33.1
124.9
0.1
436.6
27.6
61.6
Total liabilities and shareholders’ equity
1,891.6
1,510.0
1,247.4
782.3
525.9
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Strategic Report
Corporate Governance Report
Financial Statements
Appendix to the Annual Report (unaudited)
Key performance indicators
All revenue, income, impairments, and expenses used in the calculations below are stated on a continuing operations basis.
(i) Margin ratios
Net interest margin is calculated as interest receivable and similar income less interest expense and similar charges
as a percentage of the average loan book, net revenue margin is calculated as operating income as a percentage
of the average loan book and gross revenue margin is calculated as interest receivable and similar income plus fee
and commission income as a percentage of the average loan book. The calculation of the average loan book is the
average of the monthly balance of loans and advances to customers, net of provisions and discontinued operations:
2017
£million
2016
£million
Net interest margin
Interest receivable and similar income
Interest expense and similar charges
Net interest income
Net revenue margin
Net interest income
Net fee and commission income
Operating income
Gross revenue margin
Interest receivable and similar income
Fee and commission income
Gross revenue
Opening loan book
Closing loan book
Average loan book
Net interest margin
Net revenue margin
Gross revenue margin
141.3
(26.7)
114.6
114.6
14.9
129.5
141.3
16.0
157.3
1,255.5
1,598.3
1,418.1
8.1%
9.1%
11.1%
A reconciliation of the loan book figures used above to the statement of financial position is as follows:
Balance sheet loan book
PLD loans
The margin ratios all measure the yield of the loan book.
2017
£million
1,598.3
–
1,598.3
2016
£million
1,321.0
(65.5)
1,255.5
118.8
(26.3)
92.5
92.5
14.5
107.0
118.8
16.3
135.1
886.3
1,255.5
1,065.1
8.7%
10.0%
12.7%
2015
£million
960.6
(74.3)
886.3
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Secure Trust Bank PLC Annual Report & Accounts 2017
Straightforward transparent banking
Appendix to the Annual Report (unaudited)
continued
Key performance indicators continued
(ii) Cost ratios
Cost of risk is calculated as net impairment losses on loans and advances to customers as a percentage of the average loan
book, cost of funds is calculated as interest expense as a percentage of average loan book and cost to income ratio is
calculated as operating expenses as a percentage of operating income:
Net impairment losses on loans and advances to customers
Average loan book
Cost of risk
Interest expense
Average loan book
Cost of funds
Operating expenses
Operating income
Cost to income ratio
2017
£million
33.5
1,418.2
2.4%
26.7
1,418.2
1.9%
71.3
129.5
55.1%
2016
£million
23.3
1,065.1
2.2%
26.3
1,065.1
2.5%
64.3
107.0
60.1%
The cost of risk measures how effective the Group has been in managing its impairment losses. The cost of funds measures
the cost of money being lent to customers. The cost to income ratio measures how efficiently the Group is utilising its cost
base in producing income.
(iii) Return ratios
Annualised underlying return on average assets is calculated as the underlying profit after tax for the previous 12 months as
a percentage of average assets, annualised underlying return on average equity is calculated as the underlying profit after
tax for the previous 12 months as a percentage of average equity and annualised underlying return on required equity is
calculated as the underlying profit after tax for the previous 12 months as a percentage of average required equity.
Underlying profit after tax is profit after tax attributable to continuing operations, adjusted for items that are non-controllable
items or other items that fall outside of the Group’s core business activities. A reconciliation of underlying profit after tax to
statutory profit after tax is provided on page 14.
Average assets is calculated as the average of the monthly assets balances, net of discontinued operations, average equity
is calculated as the average of the monthly equity balances and average required equity is calculated as the average of the
monthly balances of total required equity. Total required equity is calculated as the equity required to achieve a CET1 ratio
of 12%, excluding equity required against discontinued operations:
184
Strategic Report
Corporate Governance Report
Financial Statements
2017
£million
21.5
1,444.5
1,891.6
1,639.9
236.0
249.1
242.0
146.1
173.3
159.8
1.3%
8.9%
13.5%
2016
£million
1,510.0
(65.5)
–
1,444.5
2016
£million
20.6
1,054.6
1,444.5
1,256.7
141.2
236.0
210.5
96.7
146.1
120.4
1.6%
9.8%
17.1%
2015
£million
1,247.4
(74.3)
(118.5)
1,054.6
Key performance indicators continued
Underlying profit after tax
Opening assets
Closing assets
Average assets
Opening equity
Closing equity
Average equity
Opening required equity
Closing required equity
Average required equity
Annualised underlying return on average assets
Annualised underlying return on average equity
Annualised underlying return on required equity
A reconciliation of assets to the balance sheet is as follows:
Balance sheet assets
PLD assets
Assets held-for-sale
2017
£million
1,891.6
–
–
1,891.6
Annualised underlying return on average assets measures how hard the assets of the Group are working, and annualised
underlying return on average and annualised underlying return on required equity both measure how much profit the Group
generates with the money shareholders have invested.
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Appendix to the Annual Report (unaudited)
continued
Key performance indicators continued
(iv) Funding ratios
The loan to deposit ratio is calculated as the loan book, net of discontinued operations, at the year end, divided by
deposits from customers at the year end, and the total funding ratio is calculated as the total funding at the year end, being
the sum of deposits from customers, borrowings under the Term Funding Scheme, or the Funding for Lending Scheme,
and equity, divided by the loan book, net of discontinued operations, at the year end:
Loan book
Deposits from customers
Borrowings under the Term Funding Scheme, or the Funding for Lending Scheme
Equity
Total funding
Loan to deposit ratio
Total funding ratio
The funding ratios measure the Group’s liquidity.
2017
£million
1,598.3
1,483.2
113.0
249.1
1,845.3
107.8%
115.5%
2016
£million
1,255.5
1,151.8
70.0
236.0
1,457.8
109.0%
116.1%
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Financial Statements
Glossary
Term
AIM
Explanation
The Alternative Investment Market is the London Stock Exchange’s international market for smaller
growing companies. A wide range of businesses including early stage, venture capital backed as
well as more established companies join AIM seeking access to growth capital.
ALCO
The Assets and Liabilities Committee. The remit of the Committee is set out on page 68.
Bank of England
CET 1 capital
CET 1 capital ratio
CRD IV
The Bank of England promotes the good of the people of the United Kingdom by maintaining
monetary and financial stability. It also performs a supervisory role of the banking system via the
Prudential Regulation Authority.
Common Equity Tier 1 capital comprises a bank’s core capital and includes common shares, stock
surpluses resulting from the issue of common shares, retained earnings, common shares issued by
subsidiaries and held by third parties, and accumulated other comprehensive income.
The Common Equity Tier 1 capital ratio is the ratio of the bank’s CET 1 capital to its Total Risk
Exposure. This signifies a bank’s financial strength. The CET 1 capital ratio is utilised by regulators
and investors because it shows how well a bank can withstand financial stress and remain solvent.
Capital Requirements Directive IV is intended to implement the Basel III agreement in the EU.
This includes enhanced requirements for the quality and quantity of capital; a basis for new
liquidity and leverage requirements; new rules for counterparty risk; and new macroprudential
standards including a countercyclical capital buffer and capital buffers for systemically important
institutions.
Capital Requirement
Regulation
The EU regulation implementing CRD IV directly across the EU.
DBP
DMS
ELG
EU
Deferred Bonus Plan.
Debt Managers (Services) Limited, the wholly owned subsidiary of Secure Trust Bank PLC,
responsible for carrying out market leading debt recovery services to the credit industry.
Everyday Loans Group, which comprised Everyday Loans Holdings Limited and subsidiary
companies Everyday Lending Limited and Everyday Loans Limited.
European Union.
Financial Conduct
Authority
The Financial Conduct Authority is the conduct regulator for 56,000 financial services firms and
financial markets in the UK. Its aims are to protect consumers, enhance market integrity and
promote competition.
FEEFO
The Feedback Forum collects independent reviews from the customers of over 2,500 businesses.
Funding for Lending
Scheme
The Funding for Lending Scheme was designed to incentivise banks and building societies to
boost their lending to the UK real economy. It did that by providing funding to banks and building
societies for an extended period, with both the price and quantity of funding provided linked to
their lending performance. This scheme is now in run-off and is being replaced by the Term
Funding Scheme.
The Financial
Ombudsman Service
Set up by Parliament, the Financial Ombudsman Service is the UK’s official expert in sorting out
problems with financial services.
Financial Services
Compensation Scheme
The Financial Services Compensation Scheme protects consumers when authorised financial
services firms fail.
General Data Protection
Regulation
The General Data Protection Regulation (Regulation (EU) 2016/679) is a regulation by which the
European Parliament, the European Council and the European Commission intend to strengthen
and unify data protection for individuals within the European Union. It also addresses export of
personal data outside the European Union.
High Quality Liquid
Assets
High Quality Liquid Assets are assets with a high potential to be converted easily and quickly into
cash. This is comprised of cash and balances at central banks and treasury bills that are the subject
of a repurchase agreement (see below).
IAS
International Accounting Standard.
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Glossary
continued
Term
ICAAP
IFRS
ILAAP
Explanation
Internal Capital Adequacy Assessment Process. A firm must carry out an ICAAP in accordance with
the PRA’s ICAAP rules. These include requirements on the firm to undertake a regular assessment
of the amounts, types and distribution of capital that it considers adequate to cover the level and
nature of the risks to which it is or might be exposed.
International Financial Reporting Standard.
The Internal Liquidity Adequacy Assessment Process allows firms to assess the level of liquidity
and funding that adequately supports all relevant current and future liquidity risks in their business.
In undertaking this process, a firm should be able to ensure that it has appropriate processes in
place to ensure compliance with the CRD IV. This requires firms to develop and use appropriate
risk and liquidity management techniques.
Individual Capital
Guidance
Guidance given to a firm about the amount and quality of capital resources that the PRA considers
that firm should hold at all times under the overall financial adequacy rule as it applies on a solo
level or a consolidated level.
IPO
LCR
LTIP
MREL
NSF
Initial Public Offering of the Company’s shares on AIM in November 2011.
The Liquidity Coverage Ratio regime requires management of net 30 day cash outflows
as a proportion of High Quality Liquid Assets. The Group has set a more prudent internal
limit than that proposed in guidance from the regulator.
Long term incentive plan.
Minimum Requirement for Own Funds and Eligible Liabilities regime.
Non-Standard Finance plc, the AIM listed business that bought ELG on 16 April 2016.
Overall Liquidity
Adequacy Rule
The Overall Liquidity Adequacy Rule is the Board’s own view of the Group’s liquidity needs
as set out in the Board approved ILAAP.
Pillar 1, Pillar 2 and
Pillar 3
PRA
Basel III uses a ‘three pillars’ concept – (1) Pillar 1 – minimum capital requirements (addressing risk)
using a standardised approach for credit, market and operational risk, (2) Pillar 2 – supervisory
review process and (3) Pillar 3 – market discipline and enhanced disclosures. Basel II is the second
of the Basel Accords, (now extended and partially superseded by Basel III), which are
recommendations on banking laws and regulations issued by the Basel Committee on Banking
Supervision.
The Prudential Regulation Authority was created as a part of the Bank of England by the Financial
Services Act (2012) and is responsible for the prudential regulation and supervision of around
1,700 banks. The PRA’s objectives are set out in the Financial Services and Markets Act 2000, but
the main objective is to promote the safety and soundness of the firms it regulates.
PSOS
Phantom Share Option Scheme.
Repurchase agreement A repurchase agreement is a form of short-term borrowing for dealers in government securities.
The dealer sells the government securities to investors, and buys them back at an agreed point
in the future.
Required Equity
Required equity is calculated as the mean of the total required equity at the 13 previous month
ends. Total required equity is calculated to achieve a CET 1 ratio of 12%, excluding equity required
against discontinued operations.
SOS1
SOS2
SME
Share options vesting on 2 November 2014.
Share options vesting on 2 November 2016.
Small to medium sized enterprises.
Term Funding Scheme
The Term Funding Scheme is designed to reinforce the transmission of Bank Rate cuts to those
interest rates actually faced by households and businesses by providing term funding to banks
at rates close to Bank Rate. The Term Funding Scheme allows participants to borrow central bank
reserves in exchange for eligible collateral.
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Financial Statements
Term
Tier 2 capital
Explanation
Tier 2 capital is the secondary component of bank capital, in addition to Tier 1 capital, that makes
up a bank’s required reserves. Tier 2 capital is designated as supplementary capital, and is
composed of Collective allowance for impairment of loans and advances.
Total Risk Exposure
Total Risk Exposure is the total of the bank’s risk-weighted assets.
Underlying return on
required equity
Annualised underlying return on required equity is calculated as the underlying profit after tax
for the previous 12 months as a percentage of average required equity.
UPL
V12
Unsecured personal lending.
V12 Retail Finance Limited, the wholly owned subsidiary of Secure Trust Bank PLC, responsible for
retail lending.
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Straightforward transparent banking
Corporate contacts and advisers
Secretary & Registered Office
A J Karter LLB (Hons)
One Arleston Way
Solihull
West Midlands
B90 4LH
T 0121 693 9100
F 0121 693 9124
Advisers
Independent Auditor
KPMG LLP
One Snowhill
Snow Hill Queensway
Birmingham
B4 6GH
Principal Banker
Barclays Bank PLC
38 Hagley Road
Edgbaston
Birmingham
B16 8NY
Stockbrokers
Canaccord Genuity Limited
88 Wood Street
London
EC2V 7QR
Stifel Nicolaus Europe Limited
150 Cheapside
London
EC2V 6ET
Registrar
Link Asset Services
The Registry
34 Beckenham Road
Beckenham
Kent
BR3 4TU
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Secure Trust Bank PLC
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Shirley
Solihull
West Midlands
B90 4LH
T 0121 693 9100
Registration No. 00541132
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